VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS FACULTY OF FINANCE AND BANKING GRADUATION THESIS Factors Affecting Non-Performing Loans of Commercial Banks in Viet Nam Ha Noi, 2023 ACKNOWLEDGEMENT To successfully complete my graduation thesis, I would like to sincerely express my gratitude to: First and foremost, I would like to thank my thesis advisor, Ms. Cu Nguyen Ha Trang, for her unwavering support, guidance, and valuable assistance throughout the time I worked on my graduation thesis. Her expertise and encouragement played a crucial role in the completion of this thesis. I would also like to extend my heartfelt thanks to the Department of Finance and Banking, as well as University of Economics and Business, for creating a conducive learning environment that has allowed us to develop and enhance our capabilities.
Despite my self-prepared knowledge and limited deductive skills, I acknowledge that imperfections and errors are inevitable. Therefore, I sincerely hope to receive valuable contributions from esteemed professors to further improve this graduation thesis. I] express my heartfelt appreciation. COMMITMENT I solemnly declare that this is my research work, with the support of my advisor, Th.S Cu Nguyen Ha Trang.
The research content and findings presented in this thesis are honest and have not been published in any previous research work. The data in the tables, which serve for analysis, comments, and evaluation, have been collected by the author from various sources, as indicated in the reference section. If any form of academic misconduct is discovered, I take full responsibility befor the council and the outcome of my thesis. Student Dang Tran Gia Linh Contents List of Abbreviations List of tables List of figures CHAPTER 1: INTRODUCTION .1 The urgency Of the tOpic .«- «se SH HH 10 1.2 Research Obj€CẨÏV€S.4 Scope Of the Study .5 Data and reserach methodOÏOBV.6 Contribution Of StUCY.7 Structure Of the Study .ccscssssssssssssssssesseesesseessssesecaeaesseeseeesesesassrseeeeesesesecaseeeseeseesesenanas 13 CHAPTER 2: LITERATURE REVIEW.1 Definition of non-performing ÏOaTIS.2 Factors affecting non-performing ÏOa'S.3 Consequences of non-performing ÏO4'S.-«-<c<c<eseseseseseseeseeersrsrsre 21 CHAPTER 3: RESEARCH METHODOLOGGY.2 Research model and hypothesis .4 Research metho(OÏOBV.-- «series 30 CHAPTER 4: RESULTS AND DISCUSSION.1 Current situation of NPLs in VietNam .2 DesCriptive StAatÏSLÍCS.
con HH HHRRRHRHRRSEEEEEEESEEESESEEESEiE 36 4. HH HH HH HT HH TH HH HH HH HH 43 5. «càng HHranaghnHHHTrarrkrrsnxisrsrrrsrsrsrsrsrrixrsrrrrsrse 46 List of Abbreviations IMF International Monetary Fund BCBS Basel Committee on Banking Supervision ECB European Central Bank SBV State bank of VietNam VAMC Vietnam Asset Management Company NPL Non-performing Loan LLP Loan Loss Provsioning LGR Loan Growth LA Loan To Total Asset ROE Return On Equity GDP Gross Domestic Product EPU Economic Policy Uncertainty OLS Ordinary Least Square FEM Fix Effect Model REM Random Effect Model List of tables Table 3.1: Names of 19 banks used in the sample Study.2: List Of VariaÌ©S.4: DeScriptive StatÏSĂÏCS. «se hnrnrrkrree 35 Table 4.5: Correlation AT ÏX.7: Breush - Pagan Lagrangian t€SK.-- «5< se herg 40 List of figures Figure 4.1: Non-performing loans ratio in Vietnam from 2007 to 2016 .2: Non-performing loans ratio of Vietcombank from 2015 to 2021.3: Non-performing loans ratio of BIDV from 2019 to 2021.
Abstracts Credit activity is a crucial operation for banks, significantly contributing to their profitability. However, poor credit quality and ineffective risk management can lead to non-performing loans. This research examines data from 19 commercial banks operating in Vietnam during the period 2000-2022 to investigate the impact of both bank-specific factors and macroeconomic factors on the non-performing loan ratio in Vietnamese commercial banks. The methodology employed for estimation is regression analysis using panel data, which includes the Pooled OLS, Fixed Effects Model (FEM), and Random Effects Model (REM), along with model selection tests to determine the most suitable model for this study.
The research found that out of the seven bank-specific factors and macroeconomic variables considered, three have a significant influence on non-performing loans in Vietnamese commercial banks. Based on the study's findings, the author proposes several solutions grounded in the factors of significance identified in the research to contribute to mitigating non-performing loans in Vietnamese banks.1 The urgency of the topic NPLs is a credit risk that not only has a significant impact on the business activities of commercial banks, but NPLs also affects the ability of businesses to access capital, thereby causing negative effects on the growth and development of the national economy. According to the International Monetary Fund (IMF) and the United Nations, a debt is considered non- performing when the interest and/or principal payments are overdue by more than 90 days; or when interest payments are overdue for more than 90 days but have been capitalized, refinanced, or delayed under an agreement; or when payments due are overdue for less than 90 days. Besides, according to the definition provided by the Basel Committee on Banking Supervision (BCBS), there is no specific time frame for determining when a debt is classified as non-performing.
Instead, it is considered a non-performing loan when it is overdue, and the bank determines that the borrower lacks the ability to fully repay the debt without taking any remedial actions. The classification is based on the bank's assessment of the borrower's repayment capacity rather than a specific time period for overdue payments. In Vietnam, non-performing loans (NPLs) are not directly defined but are indirectly determined through regulations on loan classification, provisioning, and the use of credit risk reserves in the banking activities of credit institutions. According to the classification of Viet Nam’s Banking system, NPLs is divided into 5 main groups, in which customers classified in groups 3 to 5 are the most risky customers.
Therefore, non-performing loans in Vietnam currently bear similarities to international standards. Generally speaking, the higher the bank's NPLs, the lower its capital profitability, constrain the bank's growth. Hence, NPLs is considered as a financial burden for commercial banks, which can reduce profits and reduce capital of a bank. In addition, it might lead to a decrease in capital adequacy ratio and a decline in shareholders’ equity.
As a consequence, a rising non-performing loans might put banks in danger of bankruptcy, which has been done in research by previous studies (Demirgii¢-Kunt,1989; Barr and Siems, 1994). In addition to its negative impact on banks, NPLs also have significant influence on businesses and the overall economy. Specifically, NPLs can directly affect the overall development of a country. Furthermore, NPLs can lead to cascading effects that undermine development and, in more severe cases, can result in the collapse of the entire banking system, posing threats to the national financial security and economy.
This becomes even more critical as a majority of 10 businesses today are small and medium-sized enterprises (SMEs) whose capital primarily relies on loans from financial institutions. Indeed, if banks are negatively affected by NPLs and are forced to tighten lending, it can cause a disruption in the flow of operational capital, significantly impacting both individual businesses and the entire economy. Overall, if the NPLs of a bank worsen and are not timely resolved, it can lead to the bank's collapse, triggering a chain reaction within the banking system and the entire economy. Therefore, policymakers need to pay attention and focus more on the issue of NPLs.
They understand that NPLs have significant implications for the stability of the financial system and economic growth. Emipirically, Messai and Jouini (2013) mention that NPLs are among the leading causes of economic stagnation. Therefore, minimizing NPLs is necessary for improving economic growth. By addressing the issue of NPLs, policymakers aim to safeguard the stability of the financial system, promote economic growth, ensure smooth credit provision, and support access to finance for productive activities.
The identification of factors influencing non-performing loans in commercial banks is crucial. Exploring this research question can assist policymakers and bank administrators in formulating effective policies and solutions to mitigate risks, reduce non-performing debts, and enhance the overall efficiency of banking operations. Furthermore, during and after the COVID-19 pandemic, the situation of NPLs in Vietnam has become concerning. The strong impact of the pandemic has caused economic turmoil, particularly in sectors such as tourism, services, manufacturing, and exports.
Businesses have faced financial difficulties due to reduced revenues and the ability to repay debts, leading to an increase in the number of NPLs within the banking system. However, the government and the State Bank of Vietnam have implemented various measures to support businesses and mitigate the effects of the pandemic. Policies such as debt restructuring and financial assistance have been implemented to help businesses and individuals overcome financial hardships and reduce the risk of NPLs. At the same time, banks have enhanced risk management and focused on monitoring and addressing NPLs.
These efforts aim to ensure the stability of the banking system and minimize the negative impact of NPLs on the business operations of financial institutions. Although specific data on the post-COVID-19 NPLs situation in Vietnam may change over time, it is certain that the pandemic has had a significant impact on the NPLs situation in the economy. This calls for attention and proactive 11 measures from policymakers and banks to ensure financial stability and restore economic development in the country. For these reasons, in order to enhance a correct understanding of the factors influencing the situation of NPLs in commercial banks in Vietnam, especially the importance of NPLs resolution in the current economy, this study aims to contribute a fresh perspective on the issue of NPLs.
While there have been numerous studies on this topic in the past, this research updates the latest data and investigates the factors impacting NPLs to propose solutions and recommendations for banks and policymakers. Therefore, I have decided to choose the topic "Factors Influencing Non-Performing Loans in Commercial Banks in Vietnam" as the focus of this research.2 Research objectives The aim of the study is to identify factors that affect NPLs of banks in Vietnam, and to find solutions and suggestions that can reduce the risks of NPLs.3 Research questions e Whatare the factors affecting NPLs of commercial banks in Vietnam? e What is the degree of impact of macro and micro-factors on NPL of commercial banks? e What are the solutions and recommendations to reduce NPL? 1.4 Scope of the study The research examines the determinants of NPLs of 19 listed commercial banks in Vietnam from 2000-2022.5 Data and reserach methodology Regarding bank-level data, the data is collected from financial statements of commercial banks. Besides, the macro-variables is collected from World Development Indicator and Global Economic Policy Uncertainty Index is collected from www.com (Becker et al. After synthesizing the data from the research variables, I run the OLS, FEM and REM regression to examine the factors affecting NPLs of commercial banks.6 Contribution of study The study on "Factors Affecting Non-performing Loans of Commercial Banks in Vietnam" can make a significant contribution to understanding the credit conditions and risk management capabilities of commercial banks in Vietnam.
By analyzing factors related to the characteristics of banks such as bank size, credit growth, loan-to-asset ratio, return on equity, credit risk provisions, and macroeconomic variables such as fluctuations in GDP growth rate this study aims to explain the relationships between these variables and non-performing loans in Vietnamese banks. Additionally, the study will incorporate economic policy uncertainty as a variable to further enhance the understanding of these relationships with non-performing loans. Therefore, this research will help banks identify key factors influencing non-performing loans, facilitating the development of solutions and recommendations to mitigate the risk of non-performing loans of Commercial Banks in Vietnam.7 Structure of the study The research is divided into five main sections. First one will provide an overview of the subject and objectives of the study.
The second section will focus on an overview of previous literature, research gaps and theoretical framework, clarifying issues related to NPLs. The next sectiondicusses research methods, which will provide a detailed description of how research is carried out, including data collection and analysis. The fourth section will present concrete findings on the factors affecting NPLs of banks. Finally, the last section of the study will also provide proposals for solutions, requests for bank support.