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Non-performing loans: Affecting factor for the sustainability of Vietnam commercial banks

Non-performing loans: Affecting factor for the sustainability of Vietnam commercial banks. Non-performing loans are becoming the main factor influencing the sustainability of Vietnam’s financial system. In order to enforce the financial system in general and the banking system in particular, this study aims to examine the determinants of Non-performing Loans (NPLs) in the Vietnamese banking system.



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Journal of Economics and Development, Vol.17, No.1, April 2015, pp. 93-106

ISSN 1859 0020

Non-Performing Loans:
Affecting Factor for the Sustainability of
Vietnam Commercial Banks
Nguyen Thi Minh Hue
National Economics University, Vietnam
Email: huenm@neu.edu.vn

Abstract
Non-performing loans are becoming the main factor influencing the sustainability of Vietnam’s
financial system. In order to enforce the financial system in general and the banking system in
particular, this study aims to examine the determinants of Non-performing Loans (NPLs) in
the Vietnamese banking system. Particularly, four factors, including the lag of NPLs in the last
year, Loans-to-Asset ratio, Total asset and the Dummy (state-owned or not) were observed and
estimated by quantitative method Ordinary Least Square in order to declare the relationship
between them and the rate of changes in NPLs. The results showed that the four factors (Growth
rate of Loans, Total Assets of Banks, NPLs in the last year and the Dummy variable) actually
helped the growth of NPLs in recent years. Further, some implications to the bank management
are withdrawn.
Keywords: Bank-level factors; macro factors; Non-performing loans (NPLs); Vietnamese
commercial banks,

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Vol. 17, No.1, April 2015

1. Introduction

To start with, Sanjeev (2007) constructed
a model in order to derive which factors affect the changes in the number of NPLs in the
Indian banking system. In order to clarify the
relationship between the independent determinants and NPLs, he used primary data collected
from structured questionnaires to the managers
of the 37 Indian commercial banks. Hence,
Sanjeev used Hypothesis testing – the Z test
with a 99% significant level of one tail to test
the effects of endogenous and exogenous factors on the changes in the number of NPLs. The
result showed that the exogenous factors made
more of a contribution to the changes in NPLs
than the endogenous factors. Particularly, in
listed internal factors, lack of motivation of
managers, managers not being fully competent in appraising the value of collateral, lack
of effort to reduce costs, lack of effort on the
part of managers, lack of manpower, and lack
of focus on top managers, are the accepted
independent variables among many internal
factors. Otherwise, almost all external factors
including Central and Local government control, political intervention and soft budget constraints have a high influence on the adjustment
of NPLs. Only economic downturns and willful
default by borrowers are the two insignificant
variables, which means that they do not greatly
affect the number of NPLs..

In recent years, the term “Non-performing
Loans” (NPLs) has became more common in
Vietnam’s banking system. Unexpectedly, in
the year 2012, the ratio of NPLs in Vietnam
sharply increased, appearing in most of the
commercial banks’ announcements. Moreover,
this situation turned out to be more complex
when different institutions publicized discrepant numbers of the ratio of NPLs. The annual
NPLs growth rate had sharply increase from
2007 to 2012, with an average growth rate of
approximately 43.11% per year.
Acknowledging the danger of this high ratio
to the economy and the shortage of quantitative research on this topic, it is necessary to detect and discuss the factors that determine the
rise or fall of the rate of NPLs in commercial
banks. Obviously, recent research on the problems of NPLs in Vietnam was not easy to find
out, particularly quantitative research. There
was a little quantitative research which used an
econometric model to find out the main factors
(particularly the endogenous factors) that influence the rate of changes in NPLs in Vietnamese
commercial banks. Therefore, the purpose of
this study was to find out and analyze the determinants of the NPLs in Vietnam’s commercial
banks by using the data from banks in the period from 2010 to 2012. In doing this, this study
preferred to use both descriptive and quantitative analysis to find out the result and some implications in NPLs management activities.

In a similar study, Louzis et al. (2010) were
also working on a model testing the effect of
macroeconomic and bank specifics factors on
the changes in NPLs in the banking system of
Greece. The outcome was that the macroeconomic factors (such as unemployment, GDP,
national debt) and the role of banks in managing their organizations had strong effects on

2. Literature review
There had been lots of researchers working
on the topic around NPLs, looking at aspects
such as its causes, consequences and solutions
to manage unexpectedly high NPLs ratios.
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Vol. 17, No.1, April 2015

ratio such as Return on Asset (ROA), Return
on Capital Employed (ROCE) and so on. Based
on the regression result, the operation of AMCs
in Thailand and the enhancement in macroeconomic variables were successful in reducing
the number of NPLs in Thai and Malaysian
banks. Furthermore, the banks that had larger
assets and better ratios would generate smaller
bad loans. As a result, the reform of the banking system in Thailand and Malaysia after the
1997 financial crisis contributed a big improvement to the economy. Moreover, Jarmo (2001)
and Gerlach and W. Peng (2005) also gave a
contribution on an analysis of the correlation
between macroeconomics, property prices and
banking crises substantially.

NPLs. The specialty of this research is that the
author created different models for different
panels, including: time lag, long-run or shortrun coefficients. Due to their results, the lagged
dependent variable is significant and negatively
related to the fact that when NPLs in the previous quarter decrease, they would increase
in the following quarter. Furthermore, for the
mortgage loans, macro-factors were the key influence on NPLs. Additionally, for the long-run
model, all of the variables are significant. The
size of GDP growth negatively implies that the
number of NPLs would increase when there
was an economic crisis. Besides, unemployment is the most sensitive factor and it positively affects the NPLs. When the unemployment
rate increases, creditors lose their ability to pay
back their loans because of their wages being
cut. In addition, mentioned in this research are
some other variables such as lending rate, sovereign debt and so on. Other researches on the
same topic can be listed as Xu (2005), Zeng
(2012).

Nevertheless, we can see that one of the
most popular solutions that is commonly used
is the establishment of AMCs. As Xu (2005)
stated in her research, according to the lessons
from Thailand, Malaysia and Korea, China also
established Asset Management Corporations
(AMC) to resolve the NPLs. In addition, Wang
and Perser (2011) also examined the resolution
of NPLs in some Asian countries like Japan and
South Korea to declare the lessons and solutions for China’s banking system which used
the AMCs to decrease the amount of NPLs and
its consequence on the economy. While the
NPLs in Japan was substantially released by
the government, particularly by restructuring
the loans, both China and Korea left NPLs to
the AMCs to resolve, based on the RTC of US.
They organized auctions in which they only
sell NPLs that makes the NPLs’ price fluctuate,
attracted more foreign investors to buy NPLs
and made a large contribution when investors
injected money into the economy. Other related

After deriving the root causes of the NPLs,
many authors gave comments on the resolution
of the NPLs all over the world. Initially, in order to test the relationship between macroeconomic variables like GDP growth or real estate
prices, the number of loans sold to the AMCs,
the bank size, performance and the decline of
NPLs, Inoguchi (2012), followed the studies of
Ueda K. (2000), Hu et al. (2004), and Hosono
K. (2010) and built a model to test how much
these factors above could decrease the number
of NPLs. Particularly, the macroeconomic variables she mentioned are the GDP growth or the
real estate price index, while the bank size and
performance here could be seen as the bank’s
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Vol. 17, No.1, April 2015

too much on the loans (80% - 90%), hence,
when the economy went down, the interest rate
charged on loans shot up. Their profit could
not pay back the interest payments, hence, they
were vulnerable to go bankrupt.

documents are Klingebiel (2000), Fung et al.
(2002), Pornavalai and Cynthia (2002).
In addition, Klingebiel (2000) made a more
detailed study of the AMCs by using two approaches: a centralized and a decentralized approach. The first approach can be known as the
only AMC which was set up by the government
in order to buy the NPLs from the credit institutions. Otherwise, the second approach refers
to small AMCs, launched and operated by a
parent bank for the main purpose of handling
its bad loans. The paper then also was followed
by the deep analysis and further comparison of
some other countries’ AMCs operation such as
Swedish, Spain, Philippines, and Mexico.

One study that works on the specific data of
Vietnam commercial banks is that of Do and
Nguyen (2014). Using data of ten commercial
banks in Vietnam between 2005 and 2011, this
research aims to identify the determinants of
non-performing loans in Vietnam. The result
shows that both macroeconomic and bank-specific factors exert considerable influences on
the rate of non-performing loans. Specifically,
a lower GDP growth rate results in a higher
NPLs ratio while a higher inflation rate leads to
a greater level of NPLs. Besides, the empirical
result shows a significant positive relationship
between the previous NPLs/bank size/loans to
assets ratio and the current NPLs, and a negative one between banks’ inefficiency/worst
performance and the level of NPLs. This study
uses operating expenses to calculate the inefficiency of banks, however, there is a lack of
transparency of the operating expense figures
in the Vietnamese banking system. However,
this research does not test for the best-fit model
but uses the Pooled OLS. Besides, the number
of banks included in the data set is quite small.
All of these weaknesses reduce the reliability
of this result.

Besides, Vietnamese researchers also gave
contribution to the topic of NPLs. Minh (2012)
said that the NPLs in Vietnam increasingly go
up, comprising 10% of total loans (calculated to
June 2012) and these belong mostly to the stateown companies. He also mentioned the case
of South Korea – the KAMCO (Korean Asset
Management Corporations) operation and then
suggested some solutions for the Vietnamese
banking system in NPLs reduction. Additionally, Vietnamese researchers’ also wrote about
the factors which were involved in the changes
in the NPLs rate of Vietnam commercial banks.
An illustration is given by (Vu T. D., 2013)
who divided the causes of NPLs increases into
four groups: from banks, customers, collateral
(depreciation of the asset) and other objective
causes (mainly dependent on economic status).
Further, he also stated that if banks loosen their
screening and monitoring of the loans they
give to customers, the opportunities for NPLs
increases. In addition, in customers’ groups, it
is said that many firms and businesses relied
Journal of Economics and Development

To summarize, all studies mentioned the
NPLs definition, their determinants and the
experiences of other countries in resolving
them. However, the majority of Vietnamese
studies analyzed theoretically and objectively.
It is difficult to find research using a quantitative method. Consequently, the purpose of
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Vol. 17, No.1, April 2015

this study, following lots of models above, is
to construct a regression model which has customized ideas from (Klein, 2013) and uses the
best method out of three methods: the Fixed Effects Method, the Random Effects Method and
the Ordinary Least Square method to estimate.
Besides, to enhance the reliability of the result,
this study mainly focuses on testing the effects
of the four bank-level determinants that are
publicly announced (i.e. total assets, the growth
rate of Loans to Assets ratio, and the lag variable of NPLs in one previous year), on the level
of changes in the case of NPLs in Vietnam.

operations of banking when they limited their
lending activities in order to avoid NPLs. Since
firms could not find exposure to the funds they
needed, their activities became stagnant and
then resulted in a big negative influence on the
real economy. As we can see from the Figure
1, the NPLs ratio increased in the opposite direction with the recovery rate of the economy
which implied that the higher NPLs rate, the
lower the GDP growth. More precisely, the
growth rate of NPLs ratio delayed all the activities of the financial system.
Beside some endogenous factors belonging to the commercial banks themselves, the
changes in NPLs can also be affected by some
macro factors such as economic cyclicality and
government management.

3. Circumstance of non - performing loans
in Vietnam’s commercial banks
The high rate of NPLs in 2012 led to lots
of negative effects on the economy, predominantly the adverse selection problem. Consequently, fears of uncertainty in the financial
markets suddenly increased which delayed the

The very first reason that led to NPLs was
that the business environment had to face
lots of difficulties since the financial crisis in

Figure 1: NPLs ratio and GDP growth in Vietnam 2008-2012

10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%

6.18%

2008

6.78%
5.32%

2009

2010

NPLs Ratio

5.90%

2011

5.60%

2012

GDP Growth

Source: SBV’s annual report 2008-2012
Journal of Economics and Development

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Vol. 17, No.1, April 2015

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