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 incorporates 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 2005 to 2015. The extant literature present non-performing loans as one of the most important factors effecting on profitability and lending behavior. Throughout the whole sample, we found some evidences that non-performing loans has statistically significant negative effect on Vietnamese commercial banks profitability and lending behavior. These findings show that in order to improve the performance of the Vietnam commercial banks, bank managers and governors have to deal with the non-performing loan problem.