Determinant of non-performance loans - the case of Vietnamese banking sector

Abstract

The main purpose of this study is to examine the determinants of non-performing loans (NPLs) in the case of Vietnamese banking sector by analyzing the unbalanced panel data of 30 Vietnamese banks over the period of 2008 – 2012. Both of macroeconomic and bank-specific determinants are employed when modeling the regression of NPLs’ determinants. Macroeconomic factors including Gross Domestic Product (GDP) growth rate, unemployment rate, real lending interest rate and sovereign debt are exogenous variables that effect on NPLs. Besides that, the study examine the bank-specific determinants by analyzing relevant hypothesis such as ‘bad management’, ‘pro-cyclical credit policy’, ‘skimping’, ‘diversification’, ‘too big to fail’, ‘moral hazard’ hypothesis. According these hypotheses, return on equity, inefficiency rate, proportion of non-interest income and leverage ratio are the endogenous variables which effect to NPLs. In addition, credit growth rate is added into model to examine its effect on NPLs. Moreover, the effects of government intervention and foreign investment on NPLs are also examined in this study by investigating the difference in NPLs of state-owned banks and fully foreign-owned banks. The fixed effect of unbalance panel data is employed to test these hypotheses. Regarding bank-specific factors, the inefficiency rate and credit growth rate statistically affect on NPLs. However, return on equity, non-interest income rate, leverage ratio do not statistically significant effect on NPLs. According to regression result, it shows the negative and significant relationship between the inefficiency rate and NPLs that is consistent with ‘skimping’ hypothesis. Moreover, the relationship between credit growth and NPLs is significant and negative. As the regression result, all of macroeconomic determinants including GDP growth rate, unemployment rate, real lending interest rate and sovereign debt statistically significant affect on NPLs. The regression shows the positive and significant relationship between the sovereign debt and NPLs which is consistent with hypothesis. The increase in sovereign debt will reduce payment ability that increases the future NPLs. However, the regression shows the positive relationship between GDP growth rate and NPLs and negative relationships between the unemployment rate, lending interest rate and NPLs that is not consistent with hypothesis. Regarding the government intervention, the regression shows that return on equity and leverage ratio are affected in state-owned bank that lead to higher NPLs. However, the effect of foreign investment in fully foreign-owned banks on NPLs is not supported in this study. There are some policy implications based on the regression results. Firstly, the sovereign debt should be strictly control in order to enhance the payment ability of debtors. Secondly, the underwriting and monitoring loans process should be controlled to reduce NPLs expansion at bank level. Finally, the operations of state-owned banks should be controlled to reduce NPLs expansion in state-owned banks.