Macro determinants on non performing loans of commercial banks in vietnam

MINISTRY OF EDUCATION AND TRAINING

THE STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

TRAN NGOC LOAN

MACRO DETERMINANTS ON
NON-PERFORMING LOANS IN VIETNAM

UNDERGRADUATE THESIS
MAJOR: FINANCE – BANKING
CODE: 7340201

HO CHI MINH CITY – 2018


MINISTRY OF EDUCATION AND TRAINING

THE STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

TRAN NGOC LOAN

MACRO DETERMINANTS ON
NON-PERFORMING LOANS IN VIETNAM

UNDERGRADUATE THESIS
MAJOR: FINANCE – BANKING

CODE: 7340201

SUPERVISOR: MS. NGUYEN THI MY HANH

HO CHI MINH CITY – 2018


i

ABSTRACT
The global economic history has witnessed many financial crises have stemmed
from inefficient banking industry. Hence, the banking sector can be seen as the most
vital determinants of development and stability of the economy. In recent years, the
non-performing loan (NPL) problem of commercial banks in Vietnam has become
increasingly serious, raising concerns about uncertainty surrounding the banking sector
in particular and the economy in general. Many studies have found that NPLs are
determined by internal (or bank-specific) factors and external (or macroeconomic)
factors. The research is carried out to investigate the macroeconomic determinants on
NPLs of commercial banks in Vietnam from 2011 to 2016. Based on previous studies,
this research is going to collect the potential external factors such as real GDP growth
rate, inflation, unemployment and real interest rate. Dynamic panel data estimation is
employed to serve the purpose of this research. Dataset includes 17 commercial banks
during the period of 6 years from 2011 to 2016. The outcome reveals that
unemployment rate, GDP and real interest rate have significant influences on NPLs
while inflation rate and NPL in the previous year are found to be not relevant in the
case of Vietnam.


ii

ACKNOWLEDGEMENT
First of all, I would like to express my very appreciation to my supervisor Ms.
Nguyen Thi My Hanh for her sincere comments, for her patient guidance and useful
critiques of this work. Also, I would like to thank all the members of staff at High
quality department of Banking University, Ho Chi 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.


iii

AUTHOR’S DECLARATION
I hereby confirm that this thesis entitled: “Macro determinants on nonperforming loans in Vietnam”, is my own work, and none of this work has been
published before submission.

Regards,

Tran Ngoc Loan


iv

THESIS SUPERVISOR’S DECLARATION OF APPROVAL

I hereby confirm that I have supervised the undergraduate thesis of Ms. Tran
Ngoc Loan entitled: “Macro determinants on non-performing loans in Vietnam”.
The above mentioned thesis is completed and can be submitted for public
defense.

Sincerely,

Ms. Nguyen Thi My Hanh


v

TABLES OF CONTENTS
ABSTRACT .....................................................................................................................i
ACKNOWLEDGEMENT .............................................................................................ii
AUTHOR’S DECLARATION .................................................................................... iii
THESIS SUPERVISOR’S DECLARATION OF APPROVAL ............................... iv
TABLES OF CONTENTS ............................................................................................ v
LIST OF ABBREVIATIONS.................................................................................... viii
LIST OF TABLES ........................................................................................................ix
LIST OF FIGURE.......................................................................................................... x
CHAPTER 1: INTRODUCTION ................................................................................. 1
1.1. Banking sector in Vietnam .................................................................................... 1
1.2. Background of the study ........................................................................................ 3
1.3. Research objectives ............................................................................................... 5
1.4. Research questions ................................................................................................. 5
1.5. Research subjects and scope .................................................................................. 5
1.6. Research method .................................................................................................... 5
1.7. Significance of the study ....................................................................................... 6
1.8. Structure of the study ............................................................................................. 7
1.9. Conclusion ............................................................................................................. 8
CHAPTER 2: LITERATURE REVIEW ..................................................................... 9
2.1. Introduction ........................................................................................................... 9

vi

2.2. Theoretical Framework .......................................................................................... 9
2.2.1. Business cycle theory ...................................................................................... 9
2.2.2. Financial accelerator theory .......................................................................... 10
2.2.3. Monetary policy transmission mechanism theory ......................................... 10
2.2.4. Debt deflation theory ..................................................................................... 11
2.2.5. Inflation and loan default .............................................................................. 12
2.3. Macro determinants of non-performing loans ..................................................... 13
2.3.1. Non-performing loans ................................................................................... 13
2.3.2. GDP growth rate ............................................................................................ 17
2.3.3. Inflation ......................................................................................................... 18
2.3.4. Unemployment Rate ...................................................................................... 19
2.3.5. Real interest rate ............................................................................................ 20
2.4. Empirical Review ................................................................................................ 20
2.5. Conclusion ........................................................................................................... 28
CHAPTER 3: RESEARCH METHOD ..................................................................... 29
3.1. Introduction .......................................................................................................... 29
3.2. Research questions and hypotheses ..................................................................... 29
3.2.1. Research questions ........................................................................................ 29
3.2.2. Research hypotheses...................................................................................... 29
3.3. Model specification ............................................................................................. 31
3.4. Research method .................................................................................................. 32
3.5. Data collection ..................................................................................................... 33


vii

3.6. Conclusion ........................................................................................................... 35
CHAPTER 4: FINDINGS AND DISCUSSION ........................................................ 36

4.1. Introduction .......................................................................................................... 36
4.2. Overview of non-performing loans in Vietnam .................................................. 36
4.3. Descriptive statistics ............................................................................................ 40
4.4. Estimation results ................................................................................................. 41
4.5. Tests of specification for panel data .................................................................... 43
4.6. Discussion ............................................................................................................ 44
4.7. Conclusion ........................................................................................................... 47
CHAPTER 5: CONCLUSION ................................................................................... 49
5.1. Introduction .......................................................................................................... 49
5.2. Conclusion ........................................................................................................... 49
5.3. Policy implications .............................................................................................. 50
5.4. Limitations of the study ....................................................................................... 51
5.5. Suggestions for future research ........................................................................... 51
REFERENCES ............................................................................................................. 53
APPENDIX 1: LIST OF COMMERCIAL BANKS USED IN MODEL ............... 57
APPENDIX 2: RESULTS OF MODEL FROM STATA 13 .................................... 58
APPENDIX 3: MACRO VARIABLES USED IN MODEL .................................... 59


viii

LIST OF ABBREVIATIONS
Abbreviations

Full meaning

FEM

Fixed Effects Model

GDP

Gross domestic product

GMM

Generalized Moments of Method

GSO

General Statistics Office

IMF

International Monetary Fund

MOF

Ministry of Finance

NFSC

National Financial Supervision Commission

NPLs

Non-performing loans

OLS

Ordinary Least Square

REM

Random Effects Model

SBV

The State Bank of Vietnam

TTP

Trans Pacific Strategic Economic Partnership

WB

World Bank

WTO

World Trade Agreement


ix

LIST OF TABLES
Table 2.1 Classification of debts under quantitative method ........................................ 14
Table 2.2 Summary of literature review ....................................................................... 27
Table 3.1 Summary of Variables under Study .............................................................. 33
Table 4.1 Summary of Descriptive Statistics ................................................................ 40

Table 4.2 Summary of Estimation Result ..................................................................... 42
Table 4.3 Hansen & Arellano-Bond test ....................................................................... 44
Table 4.4 Summary of findings ..................................................................................... 45


x

LIST OF FIGURE
Figure 4.1 Non-performing loan ratio of banking system from 2011 to 2016 ............. 37
Figure 4.2 Commercial Banks selling bad debts to VAMC in 2014 ............................ 38


1

CHAPTER 1: INTRODUCTION
1.1. Banking sector in Vietnam
It can be denied that banking industry plays a vital role in the financial system
as well as the economy of any country. Banks operates as intermediation function in
that they collect money from those who have excess and lend it to others who need it
for their investment. Leading credit to borrowers is one mean by which banks
contribute to the growth of a country. Advancing credit facilities is a vital role of
banking sector. Besides, commercial banks also act as a channel to carry out the State
Bank‟s monetary policy and the government‟s policies.
Based on global economic history, most of economic crises such as Asian
financial crisis in 1997 or global financial crisis in 2008 were consequence of poor and
failed financial system. Financial crisis in 1997 started from Thailand then spread to
neighboring countries as a result of economic bubble and inefficient banking industry.
The global financial crisis in 2008 resulted from the collapse of Lehman Brother (1985
– 2008) in the United States (U.S) was an obvious evidence for the risk of a poor
financial regulation. Therefore, the banking sector can be seen as the most vital

determinants of the development and stability of the economy.
The good performance of banking sector will boost the growth of economy
especially developing countries whiles its failures will put the whole economy in a
potential crisis.
In Vietnam, there are two tiers in banking sector. The first one is the State Bank
of Vietnam (SBV) which is the main financial regulatory agency. The second one
consists of commercial banks, financial companies, credit co-operatives, people‟s
credit funds and insurances companies. The main activity driving banking system is
commercial banks. Vietnam‟s banking system has 46 commercial banks concluded: 4


2

state-owed banks; 31 joint-stock commercial banks; 9 foreign banks and 2 jointventure banks.1
Since established, banking system has changed in operations as well as policies.
In the early of 2000s, it marked a great effort of Vietnam to open up its economy to the
world such as the Bilateral Trade Agreement between Vietnam and the U.S in 2001
and Vietnam‟s successful participation in the World Trade Agreement (WTO) in 2007.
In 2008, SBV for the first time allowed 100% foreign-owned bank to operate in
Vietnam. Before that, only branch offices of foreign banks or joint-venture banks are
allowed in Vietnam. In recent years, Vietnam‟s banking industry has shown a huge
potential for foreign investment. In particularly, the government put effort to reform
banking system. SBV suggested that merge and acquisition of loss making and
incompetent banks would be necessary to improve efficiency within the industry. By
forcing incompetent banks to merge and acquire, SBV has increased exploitation of
economies of scale and reduced burden on regulators. The International Monetary
Fund, the World Bank and other international financial organizations were assisting
Vietnam in the implementation of financial reforms to help ensure stability and
promote the effectiveness of the banking system in Vietnam. In addition, trade
agreements stimulating foreign ownership and investment is also a positive sign.

Vietnam has taken part in Trans Pacific Strategic Economic Partnership (TTP) and
Free Trade Agreement with different countries. Moreover, restructuring is to
standardize banking system which will be compatible and accessible to other countries.
Vietnam‟s banking sector began 2015 on a positive note, with Moody‟s having
upgraded the financial system from “negative” to stable in mid-December. According
to the credit-rating agency, the improvement reflected the “increased stability in the

1

The State Bank of Vietnam dated 31/12/2017


3

operating environment for the banks, as well as in Vietnam‟s macroeconomic situation,
and a reduction in liquidity stress in system”.
1.2. Background of the study
In recent years, non-performing loans (NPLs) have been a great concern of
Vietnam‟s economy in general and banking sector in particular. According to financial
experts, NPLs can be seen as “a clot of blood” clogging the economy. The high rate of
NPLs did not allow the growth of bank credit of Vietnam and this led to indirect
impacts on implementation of the macroeconomic indicators. Many countries have
experienced having a large amount of NPLs in the banking system, which impacts their
economic health.
The period from 2011 to 2015 is considered as one of the most difficulties and
challenges period of banking sector. In the beginning of 2011, Vietnamese banking
system faced a lot of problems which led to the chaotic and uncontrollable situation.
High lending interest rate (18 – 21%/year) made production difficult. The volatility of
exchange rate, gold price caused market instability. In addition, liquidity stress
frequently occurred. Activities of commercial banks was risky and vulnerable. Besides,

small credit institutions affected negatively on the market.
In Vietnam, the banking sector is struggling with NPLs which have negative
impacts on their performances as well as the country‟s economic growth. In 2011, NPL
ratio was reported at 3.07% but this figure did not reflect the real level of NPLs. In
reality, NPL ratio reached over 10%, and even up to 17.43%. The high levels of NPL
also affected macroeconomic situation. Inflation rate in 2012 jumped to double digits,
causing negative real interest rate. In 2014, the NPLs of Vietnamese banking system
was 2.02%, ranked the fourth highest in ASEAN countries (higher than Singapore,
Malaysia, and Cambodia) (Hao Thi Kim Do, Lam Khanh Chu & Phuong Minh
Nguyen, 2017). However, this indicator did not reflect real NPL ratio. In February


4

2014, Moody estimated that NPLs in the banking system was at least 15% of its total
asset, more than three times SBV‟s official ratio of 4.7% at that moment. Gene Fang,
Moody‟s vice-president, said “Capital remains inadequate to absorb the extent of
potential losses stemming from pervasive weaknesses in asset quality”. At the same
time, the agency kept “negative outlook” on Vietnam‟s banking system. Although
NPLs resolutions by government has made positive progress, outstanding and potential
NPLs volume remain high, imposing risk on financial institutions‟ safety and
efficiency (World Bank, 2017). It is suggested that the major concerns and challenges
in managing NPLs stem from global and domestic economic slumps such as
commodity cycle downturns, delay in project implementation or banks‟ recognition of
stressed assets and the inability to exit these.
Many studies have shown that NPLs are determined by macroeconomic and
banking specific factors. According to Louzis (2010), macroeconomic variables,
especially the real GDP growth rate, unemployment rate have strong effects on the
level of NPLs. Nkusu (2011) determined the negative impact of GDP on NPL ratio and
positive influences of unemployment rate, inflation and real interest rate on

NPLs.Then, the studies of Ahlem Salma Messai and Fathi Jouini (2013) and Prasana
(2014) found the significant inverse relationship between growth rate in GDP and
NPLs. In addition, Prasana (2014) also showed the positive impact of inflation on
NPLs. The study of Nguyen Thi Hong Vinh (2015) gave the same result. However,
there are some studies showed different results of the relationship between
macroeconomic factors and the level of NPLs.
Because of the increasing NPLs in Vietnam, the author chooses the thesis topic
“Macro determinants on non-performing loans in Vietnam”. The study will examine
the effects of macroeconomic factors on NPL during the difficult period of Vietnam‟s


5

banking system 2011 – 2016 and suggest some recommendations for bank managers
and policy makers.
1.3. Research objectives
The main objective of this study is to determine whether macroeconomic factors
influence on NPLs in Vietnam. In particular, the study will find out how the four
macroeconomic factors, i.e. GDP growth, inflation, unemployment and real interest
rate affect NPLs of Vietnamese commercial banks.
1.4. Research questions
The fundamental question which the study attempt to answer is as follows:
To what extents do macroeconomic factors influence on NPLs in Vietnam?
1.5. Research subjects and scope
The main research subject in the study is non-performing loans in Vietnam.
This study will investigate NPLs in Vietnam from 2011 to 2016.
1.6. Research method
Dynamic panel data approach is used to investigate the relationship between
macroeconomic factors and NPLs in the Vietnamese banking system. Although
previous studies have shown that regression model like Ordinary Least Square (OLS)

method, Fixed Effects Model (FEM) and Random Effects Model (REM) are used.
However, OLS estimation does not reflect the specific cross units. Moreover, there are
some problems such as heteroscedasticity, autocorrelation in model and OLS approach
is therefore not appropriate in this case. As a result, the author will also use dynamic
panel data with Generalized Moments of Method (GMM) to analyze data. In addition,
the author also checks the usual specification tests such as Hansen test and ArellanoBond test.


6

Data: The macroeconomic data are taken from the websites of the General
Statistical Office (GSO), International Monetary Fund (IMF) and World Bank. The
data relating to NPLs are obtained and calculated from Vietnamese commercial banks‟
financial statements.
1.7. Significance of the study
The banking system always has specific risks which can not be avoided.
According to Janvisloo (2013), the quality of loan could be one of the factors which
limit the banks‟ loan supply and affect investment spending. Due to the fact that banks
play an important role in regulating of monetary policy, their performance is also
influenced by economic conditions and fiscal policies. In other words, macroeconomic
variables impact on commercial banks‟ loan quality directly. Financial crises in
economic history are obvious evidences for the relationship between performance of
banking system and macroeconomic environment. Every country has different
economic conditions as well as banking system. Therefore, it is necessary to examine
the potential macro determinants of NPLs in Vietnamese commercial banks. These
determinants include real GDP growth rate, inflation rate, unemployment rate and real
interest rate.
This study is important for banks and governments because it will inform about
the effect of macroeconomic factors on NPLs. The findings will enable managers and
investors of financial institutions make decisions on reducing risks. In addition, the

State Bank can implement appropriate policies based on the economic changes in order
to ensure the stability and performance of banking sector. Besides, the government
plays a crucial role in regulating the economy. Based on the results of this study, the
government can implement appropriate policies and solutions for macroeconomic
environment in order to ensure the development of the country as well as mitigate
potential financial crisis in the future.


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1.8. Structure of the study
This section presents the structure of this study which includes five chapters as
follows:
 Chapter 1 – Introduction
In this chapter, the research shows an overview of banking sector in Vietnam;
rational of study; research objective; research subject and scope, research method and
research significance.
 Chapter 2 – Literature Review
This

chapter

provides

a

theoretical

framework

that

explains

how

macroeconomic factors affect NPLs.
 Chapter 3 – Research method
In this chapter, some hypotheses are proposed, and then a model is built up to
describe how macroeconomic factors such as GDP, inflation, unemployment and
interest rate affect NPL. Next, it explains why GMM estimation is used and how data is
collected.
 Chapter 4 – Findings and Discussion
This chapter gives an overview of non-performing loan in Vietnam and
discussing about findings.
 Chapter 5 – Conclusions
This chapter sums up the main findings of the study. Besides, the author
discusses limitations of this study and suggests some new directions for future
research.


8

1.9. Conclusion
By revisiting the situation of commercial banks in Vietnam, this chapter reflects
how non-performing loans impact on banking sector. Therefore, it is crucial to examine
the macroeconomic determinants of NPLs in Vietnam. Also, this chapter gives an
overview of the study so that readers can easily pick out the most information at a
glance.

9

CHAPTER 2: LITERATURE REVIEW
2.1. Introduction
This chapter mentions theories which related to non-performing loans as well as
gives the concept of non-performing loans. The author also presents definitions of
explanatory variables used in this study. By revisiting empirical literature, it is basic for
author explains the knowledge gap and building hypotheses in the next chapter.
2.2. Theoretical Framework
2.2.1. Business cycle theory
The relationship between loan quality and macroeconomic variables has been
widely debated within the framework of business cycles by linking the boom and
depression of business cycles with financial vulnerability and stability of the banking
sector. Modigliani and Miller (1967) developed the theory of economic cycle and
consumption model. It was said that in the period of economic growth, enterprises and
individuals will be easier in payment of loans from commercial banks because of better
investment opportunity and business prospect. In contrast, when economic condition
slows, agents will face more difficulties in business and use of loans, thereby making
negative effects on repayment. Supporting the same idea, Mileris (2014) stated that
most of bank crisis theories are based on changes in economic fundamentals, and
regard banking crises as a natural consequence of business cycles. He developed the
statistical model to predict the increase of doubtful and NPLs in the commercial banks
when the stages of business cycle change.
GDP growth is considered as an important macroeconomic determinant of the
banks performance as well as a tool used to control business cycle fluctuations. As the
effect of economic changes mentioned above, it is expected the negative correlation
between GDP growth and NPLs. GDP growth can significantly influence the

10

borrowers‟ ability to repay loans as evidences suggest that higher GDP growth reduces
NPLs ratio (Salas and Saurina (2002); Quagliarllo (2007); Khemraj and Pasha (2009))
2.2.2. Financial accelerator theory
The financial accelerator theory developed by Bernanke and Gertle (1995)
explained that a small economic shock can have a large effect on lending and
borrowing activities. It relies on the interplay between economic agents‟ net worth and
external finance premium which arises due to asymmetric information between lenders
and borrowers. Economic agents‟ net worth is defined as the sum of liquid assets
collateral value of illiquid assets less outstanding obligations, external financial
premium is defined as the difference between of the cost of funds raised externally and
opportunity cost internal to the firm (Bernanke, Gertler and Gilchrist, 1999).
The theory argues that the less amount of borrowers‟ wealth contributed to the
project, the more interest their interests will diverge from the interests of the supplier of
external funds. Borrowers were more wager to undertake riskier projects which have a
high profitability of large return than those offering low returns. From borrowers‟
perspectives, these projects are preferred since the firms‟ losses in the case when the
projects‟ returns are low and limited to zero by legal regulation. From lenders‟
perspectives, these projects are unfavorable since they bear all, or most of, the cost in
the case of low project returns. The theory indicates that because of economic shocks,
the borrowers may not have the ability to borrow and are likely to avoid repayment of
their loans.
2.2.3. Monetary policy transmission mechanism theory
Monetary policy comprises the rules and actions adopted by the State Bank to
achieve

its

objectives.

Monetary

policy

transmission

mechanism

changes

macroeconomic factors (such as interest rate, inflation, exchange rate, unemployment,
and etc.) which can affect the ability of borrowers to pay loans so it leads to the effects


11

on NPLs. Miskin (2010) described monetary policy transmission mechanism was a
process by which policy actions translated attainment and sustenance of policy
objectives. In more detail, the change in interest rate (or money supply) affects prices
and productions in the economy. The change in monetary leads to the changes in
economic indicators such as interest rate, asset prices, expenditure, exchange rate and
credit ability of commercial bank and then to price, production and unemployment.
According to traditional transmission mechanism, expansionary monetary policy
reduces nominal interest. The impact of monetary policy on macroeconomic indicators
through traditional transmission mechanism was agreed by many experts. Moreover,
other indicators such as production, income and cash flow also influence on
expenditure and consumption. (Blinder and Maccini, 1991; Chirinko, 1993; Boldin,
1993).
According to Bernanke and Gertler (1995), channels of monetary do not operate

independently but together the changes in monetary policies. Therefore, it is vital to
assess the impact of channels in monetary on credit growth in banking system.
Transmission channels of monetary policy such as interest channel, credit channel,
asset price channel influence on the selection of antagonistic, moral hazard, investment
activities and consumptions of borrowers, repayment ability as well as loan quality.
2.2.4. Debt deflation theory
This theory was developed by Iriving Fisher following the Wall Stress Crash of
1929 and the ensuing Great Depression. Deflation occurs when prices are falling in
contrast to inflation which describes the rise in prices (Fisher, 1933).
Fisher‟s analysis is based on two fundamental principals, over-indebtedness and
deflation. This theory suggests that when the debt bubble burst the following chain of
consequences in nine links: At first, agents seek to reduce indebtedness by „liquidating‟
debt, leading to (1) distress selling and (2) contraction of deposit because people


12

withdrawn money to pay debts. These consequences caused (3) a fall in the level of
prices and (4) fall in the net worth of business, precipitating bankruptcies and (5) fall in
profits. Because of reduction in profits, business have to (6) reduce production, trade
and employment of labor. These losses, bankruptcies and unemployment lead to (7)
Pessimism and loss of confidence, which in turn lead to (8) the demand of hoarding
money. The above eight changes cause (9) complicated disturbances in the rates of
interest. In particular, the nominal interest rate falls while the real interest rate rise.
The complicated disturbances described above can be assumed as both external
and internal forces (macro and micro factors) influencing state of over-indebtedness
existing between debtors and creditors or both which can be compound to loan
defaults.
2.2.5. Inflation and loan default
Inflation is considered as a factor contributing to the performance of the banking

sector. According to Brownbridge (1998), the fluctuation of inflation would have had
two important consequences for the loan quality. Firstly, from the firms‟ perspective,
high inflation increases the volatility of business profits because of its unpredictability
nature. Consequently, it entails a high degree of variability in the rates of increase of
the prices of goods and services which make up the overall price index. Therefore, the
probability for firms making losses rises, as does the probability that they will earn
windfall profits. This decreases the ability of the firms to honour its debt obligations
which leads to increase NPLs. Secondly, high inflation makes banks have more
difficulties in loan appraisal. In more details, from consumers‟ perspective, the
viability of potential borrowers depends upon unpredictable development in the overall
rate of inflation, its individual components, exchange rates and interest rates. The
uncertainty in the behaviours of these variables puts enormous pressure on bank loan


13

offers. Moreover, asset prices are also likely to be highly volatile under such
conditions. Hence, the future real value of loan security is also very uncertain.
The higher inflation causes the increase of loan default. It is explained by
Brenda Midecha Imbuga (2014) that when the rate of inflation increases, the bank must
cushion themselves from loss of value of their cash assets by seeking higher returns
from loans. Similarly, depositors expect higher returns on their deposits to retain the
real value of their cash assets. The expectation of depositors and lenders to cover the
premium of inflation leads to rise of interest rate. This raises the cost of loans and
higher costs raise the risk of default. Therefore, inflation and loan default have a
positive correlation.
2.3. Macro determinants of non-performing loans
2.3.1. Non-performing loans
2.3.1.1. Definition
There is no single global standard definition of NPLs in the world. It differs in

different countries.
According to IMF‟s Compilation Guide on Financial Soundness Indicators 2004
(Guide), a loan is non-performing when payments of interest and/or principal are past
due by 90 days or more, or interest payments equal to 90 days or more have been
capitalized, refinanced, or delayed by agreement, or payments are less than 90 days
overdue, but there are other good reasons – such as a debtor filing for bankruptcy – to
doubt that payment will be made in full.
In Vietnam, Decision No. 493/2005/QD-NHNN of April 22, 2005 issued the
regulation on the debts, provisioning and use of provisions against credit in the banking
activity of credit institutions. In Article 2, term 6, it was stated that “NPLs are debts,
which have been classified as those in Groups 3, 4 and 5 stipulated in Article 6 or