The factors affect to the non performing loans of commercial banks in vietnam

MINISTRY OF EDUCATION AND TRAINING
HO CHI MINH UNIVERSITY OF BANKING
֎֎֎֎֎֎֎֎֎֎

GRADUATIONS THESIS
THE FACTORS AFFECT TO THE NONPERFORMING LOANS OF COMMERCIAL
BANKS IN VIETNAM
Major: Banking and Financial
Code: 7 34 02 01

NGUYEN HOANG KIM NGAN

Ho Chi Minh City - 2023


MINISTRY OF EDUCATION AND TRAINING
HO CHI MINH UNIVERSITY OF BANKING
֎֎֎֎֎֎֎֎֎֎

GRADUATIONS THESIS
THE FACTORS AFFECT TO THE NONPERFORMING LOANS OF COMMERCIAL
BANKS IN VIETNAM
Major: Banking and Financial
Code: 7 34 02 01
NGUYEN HOANG KIM NGAN
050607190289
HQ7 – GE04
SUPERVISOR: DR. DU THI LAN QUYNH
Ho Chi Minh City - 2023

i

ABSTRACT
The study examines the factors influencing problematic loans at 30 commercial
banks in Vietnam between 2012 and 2021. The study's objectives are to: (1) identify
factors influencing bad debt. (2) By developing models based on past relevant
studies' summarization, comparison, and statistical analysis. (3) Finally, using the
final research findings, provide policy implications for each element that influences
non-performing loans.
The systematization of core theories and associated studies is the first step in the
research. The author proposes to build a research model based on the previously
researched models that include the following 8 factors: non-performing loans in the
previous period (NPL1), credit risk provision ratio (LLR), bank leverage (LEV),
return on total assets (ROA), GDP growth rate (GDP_GR), inflation (INF), and
global economic policy uncertainty (WUI).
The study applied quantitative approaches to statistically represent the findings of
earlier studies that identified characteristics that significantly influenced defaulted
loans. Furthermore, the author calculates variables within the bank using data from
commercial banks' yearly financial statements. Macro variables are obtained from
economic data from the General Statistics Office, state banks, and the Federal
Reserve. The study then employs descriptive statistics, variable correlation
matrices, and regression using the OLS, FEM, REM, and SGMM methods. The
study's findings revealed that six factors out of eight were statistically significant.
Keywords: non-performing loans, the non-performing loans ratio, Join Stock
Commercial Banks, Vietnam.


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ACKNOWLEDGEMENT

First of all, I would like to express my appreciation to my supervisor Ms. Du Thi
Lan Quynh for her sincere comments, her patient guidance, and useful critiques of
this work. Also, I would like to thank all the members of staff at the High-quality
department of Banking University, HoChi Minh City. Without their assistance, this
thesis would not be completed.
In addition, I am very grateful to my family and friends for giving the biggest
support and strength in difficult moments.


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AUTHOR’S DECLARATION
I hereby confirm that this dissertation entitled: ―The factors affect to the nonperforming loans of commercial banks in Vietnam‖, is my own study, and none of
this work has been published before submission.
Regards,

Nguyen Hoang Kim Ngan


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TABLE OF CONTENTS

ABSTRACT ............................................................................................................... i
ACKNOWLEDGEMENT ....................................................................................... ii
AUTHOR’S DECLARATION ............................................................................... iii
LIST OF ABBREVIATIONS............................................................................... viii
LIST OF TABLES .................................................................................................. ix
LIST OF FIGURES ..................................................................................................x
CHAPTER 1. INTRODUCTION ............................................................................1

1.1.

The urgency of the study: ...............................................................................1

1.2.

Research objectives .........................................................................................3

1.2.1.

General objectives: ...................................................................................3

1.2.2.

Specific objectives: ...................................................................................4

1.3. Research Questions ............................................................................................4
1.4.

Subject and scope of research ........................................................................4

1.4.1.

Subjects of study .......................................................................................4

1.4.2.

Scope of research ......................................................................................4

1.5.

Research methods and data ...........................................................................5

1.5.1.

Research methodology .............................................................................5

1.5.2.

Research data............................................................................................6

1.6.

Meaning of the topic .......................................................................................6

1.7.

Layout of the thesis .........................................................................................7

CONCLUSION CHAPTER 1 ..................................................................................9


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CHAPTER

2:

THEORETICAL

FOUNDATIONS

AND

EMPIRICAL

STUDIES ..................................................................................................................10
2.1.

Theoretical basis of non-performing loans (NPLs) ....................................10

2.1.1.

The concept of non-performing loans (NPLs): ....................................10

2.1.2.

Non-performing loans classification:....................................................12

2.1.3.

Causes of non-performing loans (NPLs): .............................................17

2.2.

Determinants affect non-performing loans (NPLs) ...................................18

2.2.1.

Microelements inside the bank: ............................................................18

2.2.2 Macroeconomic factors of the economy: ..................................................21
2.3.

Foundation theory .........................................................................................24

2.3.1.

Asymmetric Information Theory: ........................................................25

2.3.2.

Pecking Order Theory ...........................................................................25

2.3.3.

Economy of Scale Theory ......................................................................26

2.3.4.

Keynesian Economics Theory ...............................................................27

2.4.

Empirical studies on NPLs ...........................................................................29

2.4.1.

Overseas studies......................................................................................29

2.4.2.

Domestic studies .....................................................................................31

2.4.3.

Synthesis of previous relevant studies ..................................................34

2.4.4.

The research gap ....................................................................................37

CONCLUSION CHAPTER 2 ................................................................................39
CHAPTER 3. RESEARCH MODELS AND METHODS ..................................40
3.1. Research process ..............................................................................................40
3.2. Research models ...............................................................................................41
3.2.1. Proposed model framework: ....................................................................41


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3.2.2. Research hypotheses:.................................................................................45
3.3. Research method ..............................................................................................49
3.3.1. Model estimation methods: .......................................................................49
3.3.1.1. Correlation Matrix: .............................................................................49
3.3.1.2. Analyze regression models to choose the suitable one .....................50
3.3.1.3. Inspection and remediation of defects of the selected model ..........51
3.3.2. Research data: ............................................................................................52
CONCLUSION CHAPTER 3 ................................................................................54
CHAPTER 4. RESEARCH RESULTS .................................................................55

4.1. Statistics describe and consider correlations. Linear multi-additive in the
study sample ............................................................................................................55
4.1.1. Descriptive statistics ..................................................................................55
4.1.2. Testing the correlation between variables in the study model ..............57
4.3. Multicollinearity inspection of the research model .......................................58
4.4. Results of regression model estimation ..........................................................59
4.4.1. OLS, FEM and REM synthetic regression model ..................................59
4.5. Results of testing and selecting suitable models ............................................61
4.6. Inspection of selected model defects ...............................................................62
4.6.1. The result of testing the autocorellation ..................................................62
4.6.2. The result of testing the heteroscedasticity .............................................63
4.8. Overcoming model defects using SGMM method ........................................64
4.9. Discuss research results: ..................................................................................67
CONCLUSION CHAPTER 4 ................................................................................73
CHAPTER 5. CONCLUSION AND RECOMMENDATIONS .........................74


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5.1. Conclusion .........................................................................................................74
5.2. Solution proposal ..............................................................................................74
5.2.1. The provision for credit risk:....................................................................74
5.2.2. Size...............................................................................................................75
5.2.3. Return on assets (ROA).............................................................................75
5.2.4. GDP growth rate and World Uncertainty Index (GDP_GR and WUI)
...............................................................................................................................75
5.3. Recommendations ............................................................................................75
REFERENCES ........................................................................................................79
APENDIX 1: LIST OF COMMERCIAL BANKS USED IN MODEL .............83
APPENDIX 2. DATA OF COMMERCIAL BANKS ..........................................84

APENDIX 3. RESULTS OF MODEL FROM STATA 13 ..................................95
APPENDIX 4. THE METHOD TO SOLVE THE NPLs OF COUNTRIES
AROUND THE WORLD .....................................................................................100


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LIST OF ABBREVIATIONS
Abbreviations
DCC-GARCH

Full meaning
Dynamic

Conditional

Generalized

Correlation
Autoregressive

Conditional Heteroskedasticity
EAT

Earning after tax

EPU

Economy policy uncertainty

FEM

Fixed effects model

FRED

The Federal Reserve economic data

FSA

Financial service authority

GDP

Gross domestic product

GSO

The

General

Statistics

Office

of

Vietnam
LEV

Leverage

LLR

Loan loss reserve

NPL

Non-performing loans

REM

Random Effects model

ROA

Return on Assets

ROE

Return on Equity

SBV

State Bank of Vietnam

SGMM

System

Generalized

Method

moments
WB

World Bank

WHO

World Health Organization

WUI

World Uncertainty Index

of


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LIST OF TABLES
Table 2.1. Debt classification of some countries in the world ................................. 12
Table 2.2. Classification of debt groups in Vietnam ................................................ 16
Table 2.3. Synthesis of related studies ..................................................................... 34
Table 3.3. Satistical table of research hypotheses .................................................... 48
Table 4.1. Statistics describing variables in the research model .............................. 55
Table 4.2. Correlation matrix between variables in the model ................................ 57

Table 4.3. Test results for multicollinearity in the model ........................................ 58
Table 4.4. Regression model results according to OLS, FEM, REM ...................... 59
Table 4.5. The result of Fisher test ........................................................................... 59
Table 4.6. The result of Hausman accreditation ....................................................... 60
Table 4.7. The result of testing autocorrelation ........................................................ 63
Table 4.8. The result of heteroscedasticity ............................................................... 63
Table 4.9. The SGMM model estimation result ....................................................... 65
Table 4.10. Compare research results with hypotheses ........................................... 67


x

LIST OF FIGURES
Chart 1.1. NPL ratio in the period 2012 – 2021 ....................................................... 3
Diagram 3.1. Research process ................................................................................ 39
Figure 3.2. Reserch model diagram ......................................................................... 41


1

CHAPTER 1. INTRODUCTION
1.1.

The urgency of the study:

The banking sector plays an important role in the chain of economic links of a
country, which is a bridge between the excessing capital and lacking capital. Banks
utilize the depositor‘s funds in an efficient manner, share risk, play a significant role
in growth of economy, are always critical to the whole financial system and remain
at the centre of financial crisis (Franklin and Elena 2008). Financial institutions are

responsible for operating the whole economy because they play an important role in
transforming deposits into productive investments (Podder and Mamun 2004).
Therefore, stability of the banking system is very vital. One of the key components
that result in financial instability or banking crisis is the NPL ratio.
Rising non-performing loans lead to the collapse of the banking system and affect
the entire economy as well as a country‘s politics. Speacifically, the NPL crisis in
2007 – 2012 occurred in Vietnam due to the impact of the global financial crisis.
Although after that, the state has had effective bad debt settlement policies and
achieved good control of the bad debt ratio in 2019. However, at the end of 2019,
the outbreak of the Covid-19 pandemic had a strong impact and changed many
economic policies globally. This makes the NPL ratio tend to fluctuate and move
closer to the same situation as the NPL crisis in 2012. To avoid a banking crisis and
exacerbation of the post-pandemic economic downturn, bank managers need to
identify factors affecting bad loans and come up with solutions to control this unit
of risk measurement.
Besides, the financing costs of non-performing loans are significant. The settlement
of non-performing loans is usually handled by asset management enterprises set up
under state control. The main task of these enterprises is to receive and settle bad
debts of financial institutions. This has the consequence of reducing the
government's budget revenue. Banks' NPL settlement costs account for between
10% and 20% of the country's total GDP (Boudriga et al., 2009). Therefore,


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research on non-performing loans in order to manage and minimize financial costs
has been a topic that has attracted a large number of economic researchers
throughout the years.
According to SBV data, the internal bad debt situation of the whole banking
industry in Vietnam in 2012 – 2022 fluctuated quite a lot. The peak NPL ratio in

2012 jumped to 4.86% due to the heavy impact of the global financial crisis in
2007-2011. Besides, it is due to the monetary easing policy in the period 2006-2007
and hot credit growth in 2009-2010. From 2013 to 2016, thanks to good
management policies and the right guidance of the Party and the State, bad debt
fluctuated on a downward trend and only reached 2.46% in 2016. The next 3 years
are the time when the country develops well, the banking system develops strongly,
so bad debts continue to decrease to 1.6% in 2019. However, bad debt tends to
reverse after being afflicted by the COVID-19 epidemic in 2020, boosting the bad
debt percentage to 1.7%. In 2021, bad debt rose to 1.9% (excluding debt sold to
VAMC). When probable bad debts in 2021 are included, this percentage rises to
3.79%. Bank debt settlement applies by Circular No. 03/03/2021/TT-NHNN and
Circular 14/2021/TT-NHNN to ease and postpone debts to alleviate difficulties for
customers affected by Covid 19. Bad debts might reach 8.2% if instructions are not
followed. After evaluating the situation and developments in Vietnam's economy in
the post-epidemic period and economic slump, many economic analysts predicted
that the bad debt ratio would fluctuate in 2022. According to the financial reports of
the fourth quarter of 2022 of some banks, bad debts tend to increase. Specifically,
VPBank was at a high level of 4.78%; Saigonbank increased from 1.97% at the
beginning of the year to 2.12% at the end of 2022; TPBank increased from 2.34% to
2.88%; VIB increased from 2.32% to 2.88%; VIB increased from 2.32% to 2.45%;
LienVietPostBank increased from 1.37% to 1.46%; Viet Capital Bank increased
from 2.53% to 2.79%; PGBank increased from 2.52% to 2.56%. Although bad debts
increased slightly in small and medium-sized banks, 7 banks kept the bad debt ratio


3

below 1% and 2 banks achieved the provision ratio of bad loans above and below
300%

Chart 1.1. NPL ratio in the period 2012 – 2021 (% of total outstanding loans)
Source: The State Bank of Vietnam (SBV)
Previous studies on non-performing loans provide many perspectives on factors
affecting bad debts in different periods of Vietnamese commercial banks. However,
it is in the context of economic stability or recession due to the financial crisis.
There is no presence of epidemic situations like the development of recent years
2019 to 2021. Therefore, the author tends to carry out the study "THE FACTORS
AFFECT TO THE NON-PERFORMING LOANS OF COMMERCIAL
BANKS IN VIETNAM" including internal banking and macro factors to provide
various perspectives for managers. From the research results, the author provides
another approach to non-performing loans and proposes solutions for the bank
manager.
1.2.

Research objectives

1.2.1. General objectives:


4

The general goal of the thesis is to understand and analyze the influencing factors to
the NPL of Vietnam Joint Stock Commercial Banks. Based on research results. The
study proposes a number of recommendations to reduce the risk of bad debt
appearing at the bank Vietnam Joint Stock Commercial Bank.
1.2.2. Specific objectives:
To achieve the general goal, the research needs to achieve specific goals following:
 Firstly, Identify the factors affecting the NPLs of Vietnamese joint stock
commercial banks. From there, the author builds appropriate research
models.

 Secondly, measure the direction and level of influence of factors affecting the
NPLs based on the result of the study.
 Lastly, the results suggest some measures to help limit and control the nonperforming loans of Vietnam Joint Stock Commercial Banks.
1.3. Research Questions
The author fabricates a list of the following key questions to accomplish the
research objectives:
 What factors impact the NPLs of Vietnamese commercial banks during the
period 2012 - 2021?
 What direction do the factors in the research model impact the NPLs?
 From the research results obtained, what policy implications does the author
propose to improve the NPLs situation?
1.4.

Subject and scope of research

1.4.1.

Subjects of study

The subject of the study is factors affecting the NPL ratio of 28 commercial banks
in Vietnam. The author decided to sample the following 28 commercial banks
because the data were transparent and consistent during the research period.
1.4.2. Scope of research


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Space: To ensure the data is reliable, the author selects the observed samples are
commercial banks including 28 joint stock commercial banks in Vietnam. The data
consists of ABB, ACB, AGRI, BIDV, BAOVIETBANK, BVB, CTG, EIB, HDB,

KLB, MBB, MSB, NAB, OCB, PGB, PVCOMBANK, SCB, SGB, NVB, SHB,
SSB, STB, VCB, TCB, TPB, VAB, VPB, VIB. The data is represented by table
data, financial data is collected from the financial statements and annual reports.
Macro data is taken from the database from General Satistic Office, State Bank and
Federal Reserve Economic Data.
Time range: the data study was from 2012 – 2021. It was a stage after economic
depression from 2012 – 2015, and development stage from 2016 – 2019. Lastly, the
period of global recession was from 2019 – 2021. This period of time covers all
steps of an economy's development, from recession to recovery, then development
and finally decline. Therefore, the author chose this period for research.
1.5.

Research methods and data

1.5.1. Research methodology
The article uses a combination of both quantitative and qualitative methods.
On the qualitative method: Initially, the author synthesizes the basic theory of bad
debt and economic theories to serve as a basis for selecting variables to build the
model. Next, the author summarizes, compiles statistics, analyzes, evaluates and
compares the results of previous related studies to build a research model.
Although the article is researched based on the combination of both methods,
quantification will play the main focus in the thesis. The author will conduct the
synthesis and statistics of factors related to bad debt on two supporting software,
Excel and Stata, respectively. Next, OLS, FEM and REM will respectively be
typical methods used during research with the goal of model measurement. In
addition, the article also uses methods such as F-Test and Hausman to test and
compare to provide the most accurate model for each case. After that, to determine


6

the robustness of the selected model, Wooldridge and ModifiedWald will be two
tests that are performed continuously with the purpose of assessing the existence of
autocorrelation and variance in the model, respectively. Finally, if the results
encounter one or both of the above phenomena, the errors that arise will be
overcome by the SGMM method.
1.5.2. Research data
The researched data collected from financial statements of 28 commercial banks
which are listed on Vietnam. The observed samples are taken over a period of 10
years (2012 – 2021) through Fiin Pro platform (The most comprehensive and
specialized financial system in Vietnam). Besides, the macro elements are obtained
from General Satistic Office and State Bank. The Economic Policy Uncertainty
ratio is acquired from Federal Reserve Economic Data.
1.6.

Meaning of the topic

Non-performing loans are a measure of risk in the financial industry. Therefore, this
has always been a topic of interest to many economic researchers. The increase in
NPLs not only affects the banking industry but also impacts the entire economy in
general. Because of the special nature of the business model of the banking system,
it is the place where capital flows in the market. Therefore, it can be said that the
non-performing loans ratio strongly affects a country's economy. The study
contributes to providing more empirical evidence on factors affecting nonperforming loans of listed commercial banks in Vietnam in the period of 2012 –
2021.
Analyze and check the impact of hypotheses posed about internal bank factors (the
previous non-performing loan, cost of provisioning for credit risks, operating
expenses, bank leverage, size, profit) and macro determinants (inflation, GDP
growth rate, World uncertainty index). The addition of economic policy uncertainty
is intended to study the impact of policymaking on a country's non-performing

7

loans. This study adds macroeconomic variables to diversify research flows in
Vietnam, contributing practical results with other data sets for subsequent bank
managers or economic researchers to reference, expand and apply.
From the research results, the article provides NPLs management implications
based on the impact of elements. Besides, it helps control bad debts from the
manifestations of increase and decrease of internal factors of the bank. In addition,
the author proposes solutions and forecasts for NPLs of commercial banks in
Vietnam to contribute to promoting economic development during the current
global recession.
1.7.

Layout of the thesis

The structure of the graduation thesis comprises 5 chapters:
CHAPTER 1: INTRODUCTION
Introduction to the reasons for choosing the topic, research objectives, research
questions, subjects and scope of research, research methods and data, and topic
meaning.
CHAPTER 2: THEORETICAL FOUNDATIONS AND EMPIRICAL STUDIES
Present the theoretical basis of factors affecting NPLs of commercial banks,
overview of the concept of NPLs, how to measure and the impact of NPLs on the
whole economy. In addition, chapter 2 also reviews background theories and
previous empirical studies to identify gaps in the previous study, thereby giving
research expectations.
CHAPTER 3: RESEARCH MODELS AND METHODS
This chapter covers the research process, research models, and research methods.

The author provides the basis for model proposals, research hypotheses, and sample
selection bases for collecting research data.
CHAPTER 4: RESEARCH RESULTS


8

Give regression results of data and perform some important tests to give
experimental regression results. The author then proceeds to test the hypotheses that
have been posed based on the results of the regression obtained. After the final
results are available, the author states the point in the discussion section and
forecasts the fluctuation trend of bad debts based on the linear regression trend
model.
CHAPTER 5: CONCLUSION AND RECOMMENDATIONS
Conclude and make recommendations to policymakers, management agencies, the
State and commercial banks. The author lays out the limitations of the study and the
direction of future research development.