The impact of non-performing loans on bank profitability and lending behavior: evidence from Vietnam

Abstract

The aim of this study is to investigate the impact of non-performing loans on profitability and lending behavior, using an empirical framework that examines whether an increase of NPLs can lead banks to reduce their profitability and lending activity. To account for profit and lending persistence, the paper applies the Generalized Method of Moments technique for dynamic panels using bank-level data for 34 Vietnamese commercial banks over the period from 2005 to 2015. Throughout the whole sample, we find some evidence that the non-performing loan has a statistically significant negative effect on Vietnamese commercial banks profitability and lending behavior. The estimation results also show that other bank specific and macroeconomic determinants affect bank profitability and lending behavior significantly in the anticipated way. These findings will be helpful for bank managers and policy makers to improve the performance and lending behavior of Vietnamese commercial banks.