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 non- performing 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. Nguyen Thi My Hanh v TABLES OF CONTENTS ABSTRACT.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. Banking sector in Vietnam.
Background of the study. Research subjects and scope. Significance of the study. Structure of the study.
8 CHAPTER 2: LITERATURE REVIEW. Business cycle theory. Financial accelerator theory. Monetary policy transmission mechanism theory.
Debt deflation theory. Inflation and loan default. Macro determinants of non-performing loans. Non-performing loans.
GDP growth rate. Real interest rate. 28 CHAPTER 3: RESEARCH METHOD. Research questions and hypotheses.
35 CHAPTER 4: FINDINGS AND DISCUSSION. Overview of non-performing loans in Vietnam. Tests of specification for panel data. Limitations of the study.
Suggestions for future research.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 vi 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 i LIST OF TABLES Table 2.1 Classification of debts under quantitative method.2 Summary of literature review.1 Summary of Variables under Study.1 Summary of Descriptive Statistics.2 Summary of Estimation Result.3 Hansen & Arellano-Bond test.4 Summary of findings.45 x LIST OF FIGURE Figure 4.1 Non-performing loan ratio of banking system from 2011 to 2016.2 Commercial Banks selling bad debts to VAMC in 2014. 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 joint- venture 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”. 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. 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.
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. GDP growth, inflation, unemployment and real interest rate affect NPLs of Vietnamese commercial banks.