(Luận văn thạc sĩ) determinants of loan repayment performance of household and micro borrowers in vietnam

VIETNAM NATIONAL UNIVERSITY, HANOI
VIETNAM JAPAN UNIVERSITY
---------------------------

PHAM THANH DUNG

DETERMINANTS OF LOAN REPAYMENT
PERFORMANCE OF MICROBUSINESS
BORROWERS IN VIETNAM

MAJOR: MASTER OF BUSINESS ADMINISTRATION
CODE: 8340101.01

RESEARCH SUPERVISORS:
Prof. Dr. HIROSHI MORITA
Assoc. Prof. Dr. VU ANH DUNG

Hanoi, 2020
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THESIS ACKNOWLEDGMENT

Foremost, I would like to express my sincere gratitude to my advisors Dr. Vu
Anh Dung and Dr. Hiroshi Morita for the support of my Thesis study and
research, for their motivation, and immense knowledge, as well their experience
in the field. Their guidance has helped me much in the time of research and
writing of this thesis.

Besides my advisors, I would like to sincerely thank the rest of my thesis
committee: Prof. and Dr. Matsui, Dr. Tran Thi Lien, Dr. Kodo, Dr. Tran Thi

Bich Hanh, and especially Dr. Yoshifumi Hino, for their encouragement,
insightful comments, and hard questions.

My thanks also go to Ms. Nguyen Thi Huong, MBA program assistant who has
enthusiastically supported me in the process of completing the procedure, as well
as connecting for smooth communication between students and advisors in the
time of my doing research.

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TABLE OF THE CONTENTS
ABSTRACT .............................................................................................................. iv
LIST OF TABLES .................................................................................................... vi
LIST OF FIGURES.................................................................................................. vii
LIST OF DEFINITIONS AND ABBREVIATIONS ............................................. viii

CHAPTER ONE: INTRODUCTION ........................................................................1
1.1. Background of the Problem .................................................................................1
1.2. Statement of the Problems ...................................................................................4
1.3. Objectives of the Study ........................................................................................5
1.4. Research Questions ..............................................................................................6
1.5. Scope of the Study ...............................................................................................6
1.6. Structure of the research.......................................................................................6

CHAPTER TWO: LITERATURE REVIEW .............................................................8
2.1. Concept and Definition ........................................................................................8
2.2. Related Literature Reviews to the Variables Used in the Study ........................15
2.3. Cox Regression Model .......................................................................................24
Table 2.1 Comparison of models on the random sample ..........................................25

2.4 Research Gap ......................................................................................................26

CHAPTER THREE: DATA AND METHODOLOGY............................................30
3.1. Description of the Study Area ............................................................................30
3.2. Data Description.................................................................................................30
3.2.1. Sampling procedure and technique .................................................................31
3.3. Variables in the Research 3.3.1. Dependent Variables .....................................32
3.4. Method for Data Analysis ..................................................................................34
3.5 Research Model ...................................................................................................37
3.6 Summary of Cox Model factors in this research.................................................38

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CHAPTER 4: RESULTS AND DISCUSSIONS......................................................39
4.1. Introduction ........................................................................................................39
4.2. Summary Statistics .............................................................................................39
4.3. Results of the Cox Proportional Hazard Model .................................................41
4.4. Discussions .........................................................................................................51

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS ............................61
5.1. Conclusions ........................................................................................................61
5.2. Recommendations ..............................................................................................63
5.3. Recommendations for Further Research ............................................................68
5.4. Limitations of the Study .....................................................................................68

REFERENCES ..........................................................................................................70

APPENDIX ...............................................................................................................73

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ABSTRACT
Introduction: Vietnam is a developing economy where the service industry and
light industry account for a big percentage of businesses in the economy.
Businesses in these sectors are almost small and micro enterprises and
household/family businesses (MSEs). They are always in need of capital for their
activities. However, it’s very difficult for them to get access to loans from banks and
credit organizations. Because they almost don’t have collateral to secure for their
loan and are not able to provide an eligible financial statement which is usually
required by banks. Consequently, banks or creditors are not interested in offering
loan to such clients because they usually don’t have collaterals and have difficulties
in providing documents as required by banks, which is very risky to a bank if they
accept such types of customers, whereas, there are not enough tools to define and
mitigate relevant risk. It’s very difficult for them to determine which are key factors
affecting on loan repayment performance of micro-businesses in Vietnam,
especially when using cash in payment is still popular, which makes banks find it
more difficult and not interested in loans for micro business. So, detailed research
on the determinants of loan repayment performance of micro-businesses in Vietnam
is essential
Objectives: The objectives of this research is to analyze the determinants of credit
risk of loan repayment performance of micro-businesses in Vietnam
Methodology: A study was conducted on 200 enterprises and household businesses
who have taken loans from Banks and P2P lending companies in Vietnam in 24
months starting from Jan 2018 to the end of 2019 (Regarding the average term of a
loan is 12 months).
The data used in this study was the secondary data from a joint-stock commercial
bank and a P2P Lending company in Vietnam. The Cox regression model is used
with twelve explanatory variables.

Loan repayment status/Default rate is the dependent variable, while twelve
characteristics of borrower and the enterprise owned by the borrower’s
characteristics are considered as explanatory variables. In this case, the value of
the dependent variable (loan repayment status) is 0 and 1, if borrowers defaulted it
takes 1 and otherwise 0.
Results: Ten out of eleven significant factors identified through the relevant model
are: Gender, Age, Housing, Educational level, Business sector, Years in business,
Percentage of share, Digital sales channel, Number of Clients, and Turnover
stability in 6 latest months, are the key factors that affect the loan repayment
performance. Among them, 5 new factors which are analyzed regarding Vietnam

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economy’s characteristics and as a result of this Research are: Percentage of share
owning, Digital sales channel, Number of clients, Turnover stability in 6 latest
months and Years in Business.
Conclusion: Hence, regarding the Research’s result, Banks and financial
companies can use it to build their credit scoring models or system. Accordingly,
increase their ability in risk management as well as enhance their desire in helping
MSEs get the loan that suitable and necessary for them, which is very important to
improve economic growth. Policymakers should pay attention to issue more proper
policy to further support for MSEs who have been given with not enough financial
as well as non-financial aids. Furthermore, enterprise’s stakeholders can use this
research’s result to increase performance rating for themselves and improve its
rating to banks and creditors.
Keywords: Credit risk; Loan repayment performance; Microcredit; Micro business;
Cox Regression model.

v

LIST OF TABLES

Table 2.1 Comparison of models on the random sample ..........................................25
Table 3.1 Sample Distribution ..................................................................................32
Table 3.2: Description of independent variables ......................................................33
Table 4.1: Status of repayment..................................................................................39
Table 4.3: Summary statistics for continuous variables ...........................................41
Table 4.4: Univariate analysis result for each covariate ...........................................42
Table 4.5: Multivariate Cox Proportional Hazards Regression results.....................45
Table 4.6: Final model of Cox PH ............................................................................46
Table 4.7: Cox Model with Time-Dependent Covariates .........................................47
Table 4.8. Analysis of The variable of “Business sector” as categorical variable....48

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LIST OF FIGURES

Figure 1.1 Enterprise size categorizes by capital scale and labor scale ............ 2

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LIST OF DEFINITIONS AND ABBREVIATIONS
Asymmetric information

Adverse selection

Banks

Creditors

Credit Scoring
Credit risk

Debtor

F&B
Financial company

Information failure occurs when one party to an
economic transaction possesses greater material
knowledge than the other party
Adverse selection is when sellers have information that
buyers do not have, or vice versa, about some aspect of
product quality
A financial institution that accepts deposits from the
public and creates Demand Deposit. Lending activities
can be performed either directly or indirectly
through capital markets
A creditor is a party (e.g., person, organization,
company, or government) that has a claim on the
services of a second party. It is a person or institution
to whom money is owed
Creditworthiness test system or also known as Credit
Risk Rating system
The risk of default on a debt that may arise from a
borrower failing to make required payments, including

both principal and interest
A debtor (also, debitor) is an entity that owes a debt to
another entity. The entity may be an individual, a firm,
a government, a company or other legal person
Food and Beverage industry

HHs

One that makes loans. It may offer loans to both
individuals and businesses. Usually, when we think of
a financial company, we think of one that offers shortterm loans to individuals. However, it may
extend credit to businesses, both small and large, as
well.
Household business or family business

MSEs

Micro and small enterprises

MSMEs

Micro, small and medium enterprises.

Microcredit

Microcredit is the extension of very
small loans (microloans) to impoverished borrowers
who typically lack collateral, steady employment, or
verifiable credit history.
A category of financial services targeting individuals

Microfinance

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NPL

Loan repayment

and small businesses who lack access to
conventional banking and related services.
Microfinance includes microcredit, the provision of
small loans to poor clients; savings and checking
accounts; micro-insurance; and payment systems
Non-Performing-Loan is a loan that is in default or
close to being in default. Many loans become nonperforming after being in default for 90 days, but this
can depend on the contract terms.
Repayment of part of a loan, usually includes principal
and interest, monthly

P2P Lending company

Peer-to-peer lending, also abbreviated as P2P
lending, is the practice of lending money to
individuals or businesses through online services
that match lenders with borrowers. Peer-to-peer
lending companies often offer their services online,
and attempt to operate with lower overhead and
provide their services more cheaply than traditional

financial institutions

Working capital

is defined as current assets minus current liabilities

Secured loan

A secured loan is a loan in which the borrower
pledges some asset (e.g. a car or property) as
collateral for the loan, which then becomes a secured
debt owed to the creditor who gives the loan.

SMEs

Small and medium enterprises

Unsecured loan

An unsecured loan is a loan that is issued and
supported only by the borrower's creditworthiness,
rather than by any type of collateral. Unsecured
loans—sometimes referred to as signature loans or
personal loans—are approved without the use of a
property or other assets as collateral.

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CHAPTER ONE: INTRODUCTION

1.1. Background of the Problem
Micro enterprises and trading households (MSEs) play a vital role in the economic
growth of Vietnam. MSEs not only contribute to GDP of Vietnam, but also help
create millions of jobs which make direct contribution to reduce unemployment and
enhance public welfare. Vietnam is home to 700,000 enterprises registered under
the Law on Enterprises and more than 5.2 million trading households, in addition to
foreign-invested enterprises. In this case, the private sector accounts for over 60%
of the GDP, which undoubtedly makes it a driving force of the economy (The
Vietnam Investment Review, 2019).
In terms of labor scale, nearly 98% of total enterprises in Vietnam are classified as
Micro, Small and Medium Enterprises (MSMEs) while large-sized enterprises
account for only the remaining 2% (Decree No. 56/2009/ND-CP). Moreover, by the
General Statistics Office of Vietnam, in 2017, Vietnam also has more than 5.2
million trading households (HHs) which have similar characteristics as micro
enterprises (GSO, 2016). This research, research subjects are included of both
micro-enterprises and trading households, which is abbreviated as MSEs in this
document.

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Figure 1.1 Enterprise size categorizes by capital scale and labor scale
Since 2000, when the Enterprise Law was promulgated, Vietnam is emerging as an
attractive and potential address for investors from all over the world. According to
the Annual Business Report 2016 by Vietnam Chamber of Commerce and Industry,
Vietnam witnessed a considerable increase in the number of new enterprises
registered, number of employees, as well as total capital during the 2007-2015
period. In line with the remarkable economic development of Vietnam overall,
small and medium-sized enterprises (SMEs) in Vietnam also have experienced
amazing growth, especially

However, 70-80% MSEs in Vietnam have been facing with many challenges and
difficulties. One of key challenges to them is not having access to finance through
formal channels (Banks, other financial companies). According to the Insight Asia
survey of SMEs in 4 areas of F&B, supporting industry, fashion apparel and
cosmetics which have fewer than 200 employees and now have stable production
with workshops but intend to expand, or relocate its production / service area, 62%
of the respondents said that they faced difficulties in capital (mainly to invest in
factories, machinery ...).

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In recent years, it is easier for MSEs to get a loan due to an increase in credit
channels to them. Some banks and financial companies such as VPBank, FEcredit,
MSB, etc… have started offering loans to MSEs, but the number is still limited.
However, upward ratio of bad debt and Non-performing-loan (NPL) has been a big
concern to many banks and creditors and make them hesitate in making new loans.
NPL is a situation in which, all or a part of principal and interest is not paid duly by
borrowers which means bank will lose their money.
Consequently, banks will tighten their credit policy and the access to finance for MSEs
is even smaller. They require MSEs to give collateral or strict requirement and
procedure or documents to get a loan. In the reverse side, MSEs do not have collaterals
or are not in business long enough (usually more than 2 years as required by
Vietnamese banks) to be provided with unsecured loans, incapable of formulating
feasible production, business, projects, not good financial recording, etc. for
commercial banks to consider loan. Therefore, It’s very difficult for MSEs to get loans
from banks and credit organizations. The priority almost is given to state owned
enterprises, or big enterprises, or enterprises which have already doing business dozen
years. Due to lack of capital, MSME can’t develop as they should have been, even they
face the risk of bankruptcy, being merged and acquired quite easily.

Difficulties piled up, MSEs have no way than "take risk" to find informal sources of
capital, also known as "black market" with extremely high lending interest rates, which
almost lead to undesirable consequences as we already knew through many
report/articles of violence relating to loans from black market recently. As unofficial
survey by Viet Nam Business Association, nearly 70% of 2,600 surveyed small-andmedium sized enterprises (SMEs) had to seek loans on the black market as they were
unable to access bank loans. The businesses’ ability to access loans fell from 45 per
cent in 2011-2013 to 24 per cent in 2015. The loans granted to the remaining 30 per
cent accounted for only 3 per cent of total bank capital in the market.

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1.2. Statement of the Problems
The root cause of NPL is internal factors of the MSEs debtors. Banks can make a
mistake in making a loan decision for the debtor because the banks have a difficulty
to
separate good quality and the poor quality debtor (Taswan, 2011), which is often
called asymmetric information experienced by financial institutions (banks) and
debtor as borrowers (Bakhtiar and Sugema, 2012) and can lead to adverse selection.
Wrong choice and disbursement of borrowers will put banks into a double-risk
situation: make disbursement to not qualified borrowers and reject qualified
applicants. To minimize the risk of NPL, by [4], banks in the world implement a
creditworthiness test system called Credit Scoring. However, the more important
thing is to predict the time-to-default has not yet been well defined. In Vietnam, just
few banks focus on credit to MSEs but they almost use traditional ways of case – by
– case appraisal.

They also haven’t implemented a credit Scoring system

sophisticated enough due to inadequate analysis of key determinants and lack of a

proper credit risk modelling. Whereas, having a credit risk modelling for internal
rating is more and more important, especially nowadays, managent of risk is
required by the standard of Basel II in many countries in the world, by [27].
This leads to a fact that it’s even more difficulty for MSEs to get loans. Being afraid
of making wrong loan decisions, banks have trend to increase the requirement or
increase interest rate to compensate for the risk cost that rise from unqualified
customers and risk they may have to incur loss. Accordingly, many MSEs find it
even more difficult to get a loan from banks. If they can get a loan, the interest rate
is also very high compared with the return that they can make from their business.
This, finally, make the flow of capital not smooth and limit economic growth. Also,
high NPL ratio can also lead to crisis and make banks stop lending out. Also, it also
can make investors worried of putting money in new enterprises as well as deposit
money into bank. Accordingly, this affect to all businesses in all fields, hence to the
whole economy

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Internationally, there are many research using different models on determinants of
credit risk of MSEs, but no research is made on trading households which is one of
important business force in Vietnam. In Vietnam, no research on determinants of
credit risk of MSEs is available up to now. Hence, the research is based on some
research from foreign countries with similar characteristics in the economy to find
out determinants on credit risk of loan repayment performance of micro business in
Vietnam.
Due to this reason, this Research is necessary to analysis a credit risk of loan
repayment of micro business in Vietnam. So that, it helps banks and credit
organizations easier to define key determinants influencing default rate to mitigate
risk for themselves and widely open to offering loan to MSEs in the economy.
Accordingly, it will help banks to develop a credit scoring system in the most

proper way to minimize credit risk. It also can help MSEs improve their
performance and business efficiency through enhancing key factors that have a
great impact on their business.
Determinants of loan repayment performance to help the bank separate good quality
debtor and bad quality debtor is expected to come out as the result of the research.

1.3. Objectives of the Study
1.3.1. General Objectives
The general objective of this study is to analyze a credit risk of determinants of loan
repayment performance of micro enterprises and household businesses in Vietnam

1.3.2. Specific Objectives
Specific Objectives of the Research is:
1. To identify determinants affect loan repayment performance of micro
businesses in Vietnam. Micro business includes micro enterprises and
household business.

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2. To identify association between categories of covariates and loan repayment
performance.
3. To identify the key factors for credit risk of micro credit loan repayment that
contribute on Creditors in Vietnam.
4. To investigate the most appropriate model for analyses of credit risk of
micro business loan repayment in Vietnam. Credit risk is the possibility of a
loss resulting from a borrower's failure to repay a loan or meet contractual
obligations (as by Investopedia)
1.4. Research Questions
From the above point of view and Objectives, research question problem as

indicated as follows
1. What are determinants on loan repayment performance of micro business
2. What are key factors affecting default rate of micro credit in Vietnam?
3. Which model is most appropriate for analyses of credit risk of microcredit loan
repayment in Vietnam?
1.5. Scope of the Study
Research subjects are micro enterprises and trading household borrowers (MSEs) in
Vietnam. MSEs is defined in term of capital amount, annual turnover, and number
of employees as per Vietnam Enterprise Law.
These MSEs are located in Hanoi and neighboring area. Hanoi is the capital of
Vietnam with the highest density of enterprises and household businesses from
various fields and sectors in the economy. With data and sample taken within 2
continuous years of 2018 and 2019, from Hanoi and rural area – typical area, the
research outcome is expected to indicate the overview of loan repayment
performance of micro business in Vietnam.
1.6. Structure of the research
With the aim at providing a full picture of micro business in Vietnam and
determinants of credit risk of their loan repayment performance in the most detail
and transparent way, this research is presented into 5 chapters as follows:

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Chapter 1: Introduction – This chapter reveals basic ideas of the research in
terms of background, objectives, subject, and scope of the research, and
research questions in order to provide readers with general view and
motivation of the Researcher
Chapter 2: Literature review – The 2nd chapter introduce and build
comprehensive understanding over both basic and complicated concepts in
banking and finance, explanation of credit risk, as well as a consolidated

review of determinants of credit risk to the loan repayment performance of
micro business, research gap as well as popular research models used in
analyzing these determinants in Vietnam and in the world.
Chapter 3: Research methodology – After Literature review, the 3rd chapter
focus on a detail review of relevant models and the research model chosen to
apply in this research. Chapter 3 also describes how the research is designed
and carried out, how data is collected, and cleaned before processing and
analyzing in Chapter 4.
Chapter 4: Data analysis and findings focus on presenting and analyzing
data and results collected. This chapter also aims at discussion of research
results and comes up with relevant findings.
Chapter 5: Conclusion – the last chapter summarizes the contributions,
recommendations as well as limitations, and intentions for future research.

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CHAPTER TWO: LITERATURE REVIEW
2.1. Concept and Definition
2.1.1. Overview of Micro Credit
Microcredit is “the extension of very small loans (microloans) to impoverished
borrowers who typically lack collateral, steady employment, or verifiable credit
history. It is designed to support entrepreneurship and alleviate poverty”.
Microfinance—also called microcredit—is a way to provide small business owners
and entrepreneurs access to capital. Often these small and individual businesses
don’t have access to traditional financial resources from major institutions (The
balance.com)
In almost all previous Research and journals, microcredit is understood as a very
small loan amount given to the poor or business unit, or women who want to start
their own microenterprises.

The average loan amount differs from countries to countries. By [34], in USA,
average microcredit is US$9,732. In Malaysia, that is US$427, that is in India, that
is US$206
2.1.2. Micro and small enterprises (MSEs) and Household business (HHs) and
Concept of MSEs credit
The SME law in Vietnam has already been passed by the National Assembly and
took effect from 1st January 2018. As per the law, “SMEs are defined as micro,
small, and medium-sized enterprises having no more than 200 employees registered
with the state social insurance scheme in a year and meeting either of the following
two criteria:


total capital shall not exceed VND100 billion (around USD4.4 million);



total revenue of the preceding year shall not exceed VND 300 billion (around

USD13.2 million)”

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Among that, Micro and small enterprises (MSEs) is the concept to refer to very
small and micro enterprises, which total revenue of not over USD 01 million, which
is similar to VND22 billion, with an average number of employees of 50.
By Decree No. 56/2009/ND-CP, MSEs and HHs account for nearly 98% business
units of the economy in Vietnam. Their total capital normally not exceed VND10
billion. Their total working capital demand is around 1 billion per year and their
normal tenor is from 3 months to 9 months, which equals to an average loan amount

of from VND 300 million to 900 million.
These characteristics, compared with the concept of microcredit is different.
Because microcredit is referred to a very small loan amount, including the poor.
Hence, in this study, I would like to use the concept of MSEs credit, which is
explained in detail as below, to fit with research subjects in Vietnam in this
research.

MSEs credit
According to the internationally-used concept of Microcredit and regard to the
objectives of the research, a new concept will be created within the scope of this
paper. MSEs credit is understood and defined as “credit provided to micro and
small enterprises and household business for their business to a certain amount and
without collateral”. MSEs credit includes loans provided MSEs, not included other
financial services.
From now in this research, MSEs is understood both as very small and micro
enterprises and household businesses. This concept will be used throughout the
Research and the main study objectives of this Research
MSEs in Vietnam and as defined in this Research, are classified into 3 main groups,
as per the practice of banks and experience of experts, as below:

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

Startup enterprises with years in the business of fewer than 2 years. They are
in their early stage and has earned the very first income. Usually, they don’t
have enough or can’t prove financial ability and don’t have collateral to get a
loan from banks. Desired loan ticket size is around 300 to 500 million VND.



Micro and small enterprises whose precursors are household for several years
and seek for more capital to scale up their business, to move to higher target
in terms of revenue, benefit, as well as open more branches, etc… Desired
loan ticket size is from 500 million VND to less than 1 billion VND



Household or family business with a number of employees less than 10
people and average loan ticket size of 100 million VND.

2.1.3. Characteristics of MSEs credit
Number of MSEs is very high in Vietnam, and most of them have demand to get a
loan from banks and financial companies. But just a small percentage can get access
to the capital they need, because of some characteristics of MSEs, such as: they
don’t have collateral, their cash flow is frequent by month, even by day. Their
demand is repeatable which means after paying the first loan, they will ask for a
new loan. They also can ask for a higher loan amount if they prove their good
payment history after the first loan. They don’t have a strong ability of management
and documentation which means the procedure for a loan should be as simple as
possible.
Accordingly, the main characteristics of MSEs-credit includes, but not limited to:
 First, small loan amount and short-terms loan, usually up to VND500 million
and the term up to one year.
 Secondly, payment schedules is equally monthly installment (EMI), which
means MSEs pay an equal amount every month until the loan contract ends.
 Thirdly, the loan procedure for MSEs credit is expected to be as simple as
possible, with least required documents as possible because MSEs in
Vietnam haven’t equipped themselves with an adequate management system.

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 Fourth, if the clients pay well and duly, they are eligible for a top-up loan
with higher amount.
 Fifth, the interest rate is fixed during the loan term, because the term is up to
1 year (12 months)
 Lastly, MSEs loan are unsecured, which means no collateral is required. The
loan is given basing on estimate of expected turnover and income of the
client, as well as other criteria related to the owner of the enterprise.

2.1.4. Overview of Micro Creditors in Vietnam
In Vietnam, many years ago, banks and creditors mainly focus on big cooperate and
medium-sized enterprises. Normally, these are secured loans with collateral as of
real estate, factory, stock or payables. Micro creditors are almost state-owned credit
funds, and the average ticket size is just around 10 million VND, which is very
small and not enough for a MSEs’ working capital demand. Normally, as
experience by experts in banking sector and standard by many Vietnamese jointstock banks, a client of MEs will need an average of VND500 million per year to
finance their working capital demand.
Several years ago, some foreign financial companies first appeared and made big
changes to the banking and financial market in Vietnam, especially segments of
retail banking and micro-enterprises. However, due to the sophistication in appraisal
of MSEs customers, as well as small NIM (net interest margin), just a few banks
and financial companies offer loans to MSEs. Normally, they just focus on retail
banking and ignore or pay little attention to MSEs. In 2019, there are only 2 banks
and 2 financial companies, and 2 P2P lending companies offer loan to MEs with the
maximum amount of VND500 million.
Lendbiz. JSC is the only P2P lending company now in Vietnam can connect
investors and MSEs for loans up to VND 1 billion. In this study, secondary data

was taken from Lendbiz’s clients and credit officers.

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2.1.5. Credit Needs by MSEs in Vietnam.
As mentioned in the introduction part, the market of MSMEs in Vietnam is very
big, includes both small, micro-enterprises, and household businesses. This is
estimated to be around 6 million of borrowers including both MEs and HHs.
The need for credit from MSEs is very high and increasing recently when the
economy of Vietnam is in its fastest period and businesses are thirsty for capital.
Main borrowers include, but are not limited to:
First, startup enterprises which need money to finance their business when they start
a business and are expected to have potentially good cash flow in the near future.
Normally, these are enterprises that have operated for around 1 year.
Secondly, enterprises that have been in business for a certain period of time but still
in their early stage and need money to extend their activity. Normally, these are
enterprises that have operated for 2-3 years.
Thirdly, the biggest clients in the MEs group. They already got loans from banks
and all are secured loans. They have certain amount of assets but that is not enough
to secure for loans at bank. Hence, they seek for short term unsecured loan for their
working capital demand. Though the unsecured loan accounts for small percentage
among their total liability, but it still plays a very important part in their business
because it can help to maintain liquidity of the enterprise.
2.1.6. Credit Risk Defined
According to Investopedia, “Credit risk is the possibility of a loss resulting from a
borrower's failure to repay a loan or meet contractual obligations. Traditionally, it
refers to the risk that a lender may not receive the owed principal and interest,
which results in an interruption of cash flows and increased costs for
collection. [18] has similar findings. Excess cash flows may be written to provide

additional cover for credit risk. Although it's impossible to know exactly who will

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default on obligations, properly assessing and managing credit risk can lessen the
severity of a loss. Interest payments from the borrower or issuer of a debt obligation
are a lender's or investor's reward for assuming credit risk.


Credit risk is the possibility of losing a lender takes on due to the possibility
of a borrower not paying back a loan.



Consumer credit risk can be measured by the five Cs: credit history, capacity
to repay, capital, the loan's conditions, and associated collateral.



Consumers posing higher credit risks usually end up paying higher interest
rates on loans”

There are several traditional ways to mitigate risk. For instance, the lender/creditor
will take as many as possible information from the borrower, verify the information
and analyze clients using some tools depending on each type of client. To secure for
the loan in case being turned into bad debt, most of the banks in Vietnam will
require the borrower to take out their collateral, such as house, factory, car, etc. or
guarantees from third parties. Also, by the rule of risk and return, banks also charge
a higher interest rate for loan with higher risk, as a way of compensation for the

potential loss they may incur.
2.1.7. Relationship between Loan Default Problem and Determinants of Loan
Repayment Performance
Loan default problem is unwanted things and strategy to any creditors, from banks
to financial companies. When Loan default occurs, it can knock down any creditors,
destroy the lending capacity of even very wealthy creditors. It erodes benefit of
banks and also erode belief though banking and financial system. Banks and
creditors will tighten credit policy and deny new applicants to get access to credit.
Moreover, the loan default problem means the loss of future credit, loss of potential
deposit from society.
By [28], A loan default problem occurs when a borrower fails to make a payment
on time (defaults on a payment of interest or principle) or they do not comply with

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any other agreement. This is because the debtor is either unable or unwilling to
repay. In this research, Loan default problem means the failure of borrower in
making

payments.

Non-defaulters are those who repaid the loan in due date and the defaulters are
those who didn’t repay the loan within the due date.
2.1.8. Types of Loan
According to the Credit Institution Law of Vietnam No 47/2010/QH12 and Circular
No 39/2016- NHNN, Loan is the lending whereby a credit institution assigns or
commits to deliver a sum of money to customers for use for a specific purpose
within a certain period of time according to an agreement on the principle of
reimbursement. Loan can be categorzied basing on loan tenor, loan purpose,

etc..Related to business loan, there are 2 main types of loans as below:
a) Short term loan for working capital demand: A typical business cycle of each
enterprise is normally less than 12 months, depending on business sector and scale
of each enterprise. For instance, for an enterprise that provides service, it takes only
around 1 month. For an enterprise that focuses on trading, it takes from 2-3 months.
For a manufacturer, it may take longer from 3 to 5 months from the time when they
buy material, to the time they sell and collect money from the buyer. The business
cycle is even longer with construction enterprises due to the specific characteristic
of this business sector. It takes them 6-12 months, or even years to finish one
business cycle. Accordingly, the demand for working capital is always short term
and less than or equal 12 months.
c) Medium and long term loan for investing of fixed assets: Besides demand for
working capital, enterprise also need medium and long term to buy or invest in
factory building or fixed asset which is essential to medium and big enterprises.
Depreciation time will be several years, and the payback time should be relevant.
Therefore, medium and long term loans usually from over 12 months to 72 months
(equal 6 years).

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With the scale and characteristics of MSEs which most focus on service, trading or
small manufacturing small manufacturing sector, the demand of big amount for
fixed asset is not too much or they can well arrange with a short term loan. In this
research, research subjective are short term loan under 12 months.
2.2. Related Literature Reviews to the Variables Used in the Study
In this section, related literature reviews of scholars on MEs - borrower’s
characteristics, Determinants of loan repayment performance, and Creditors’
method in the appraisal of clients are addressed. The literature review is made with
the objectives of identifying research/literature on micro-credit loan repayment in

general and determinant a credit risk of MEs credit loan repayment on microcredit
and savings institution, in particular, understanding the problem and identifying any
research gaps in the area.
Normally, key variables used as determinants of credit risks and loan repayment
performance are divided into 3 main groups (Borrower characteristics, Business
characteristics, and Loan characteristics) which are: Gender, Age, Educational level,
Residence, Marital status, Business Sector, Total sale, Total income, interest rate,
loan amount, Number of dependents, extra income, an extra loan from other banks
and creditors ,etc…
Key variables used as determinants of credit risks and loan repayment can be
categorized as Qualitative and Quantitative data, regarding their own characteristics.
Some popular and commonly used variables considered as key determinants of loan
payment performance in related Literature Review are reviewed as below:

2.2.1 Gender
Gender (Male/female) is a demographic factor that is proved to affect the behavior
of each person, in many areas, and loan repayment performance is not an exception.

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