The effect of credit growth on credit quality: Evidences of commercial banks in Dong Nai province

Abstract

This research is conducted to examine and quantify the effect of credit growth on credit quality for the commercial banks in Dong Nai. In relation to this possible effect, theoretical framework of the so–called “three shifts” in the credit market is likely to explain that credit growth might have positive or negative effect on credit quality. These three shifts are generally known as: (i) a supply shift (an expansion in bank loan supply by lowering credit standards), (ii) a demand shift (an increase in loan demand to optimize business activities) and (iii) productivity shift (a positive change in macroeconomic conditions). In addition, empirical evidence confirms that rapid credit growth of commercial banks could lead to a deterioration or improvement of credit quality. The macroeconomic context for banking industry indicates that the decline in credit quality after a period of growth might be a reflection of (1) negative changes in the macroeconomic determinants which have a bad influence on the business activities of borrowers; and (2) information externality which makes banks hardly gain efficiency in evaluating their customers. This study utilizes the data of 29 commercial banks operating in Dong Nai province for the period from 2009Q3 to 2014Q4. The econometric technique of Difference GMM for dynamic panel data model is adopted in order to examine the effect of credit growth on credit quality in the context of the commercial banks in Dong Nai. This study finds empirical evidence to confirm that credit growth causes the decrease in credit quality after three quarters to one year. In addition, this effect of credit growth in the long run is found in this study. These findings obtained from this study reflects that: (i) commercial banks in Dong Nai might have lowered their credit standards to increase their lending to business customers and individuals; (ii) the conditions of local economy in Dong Nai might have not been really favorable for business activities during the research period; (iii) and the information externality in the loan market might have distorted the accuracy of customers evaluati on in relation to their financial capacity