Determinants of credit risk in commercial banks of vietnam from 2016 2021

BANKING ACADEMY OF VIETNAM ADVANCED PROGRAM GRADUATION THESIS DETERMINANTS OF CREDIT RISK IN COMMERCIAL BANKS OF VIETNAM FROM 2016 - 2021 Student Name: Nguyen Hoang Long Student Code: 21A4010863 Course: 2018 - 2022 Class: K21CLCA Instructor: Ms Dao My Hang (MA) Hanoi, May 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014126176711000000 ACKNOWLEDGEMENTS First of all, I would like to sincerely thank the banking faculty and advanced programs who wholeheartedly taught and equipped me with necessary knowledge during my time in the lecture hall It is the foundation for me to be able to complete this thesis well I would like to thanks Ms Dao My Hang for her enthusiastic help and orientation in scientific thinking and working methods Those are very v aluable suggestions not only in the process of writing this thesis but also as a stepping stone for me in the process of studying and setting up a career in the future Thanks to my family, friends, and the K21CLCA class, who are always ready to share and help in study and life Hopefully, we will stick together forever Finally, due to the limited professional and practical knowledge, the article may have shortcomings I look forward to receiving feedback from teachers to improve the article Thank you and best regards i COMMITMENT I hereby declare that the thesis "Determinants of Credit Risk in Commercial Banks of Vietnam from 2016 - 2021" is my own research work The sources cited, data and content used in this thesis are collected from facts with clear, honest, objective sources and no other people's work/research is used in this thesis without being properly cited I take full responsibility for the content and truthfulness of this thesis Hanoi, 23th May 2022 Author Nguyen Hoang Long ii TABLE OF CONTENTS ACKNOWLEDGEMENTS i COMMITMENT ii LIST OF ABBREVIATIONS vi LIST OF TABLES vii LIST OF FIGURES vii INTRODUCTION CHAPTER 1: THEORETICAL BASIS OF CREDIT RISK AND FACTORS AFFECTING CREDIT RISK OF COMMERCIAL BANK 1.1 Overview of the credit risk of commercial banks: 1.1.1 Credit risk concept: 1.1.2 Causes of credit risk: 10 1.1.2.1 Cause from inside the bank: 10 1.1.2.2 Caused by external objective factors: 11 1.1.3 Consequences of credit risk: 13 1.1.3.1 Consequences for banks: 13 1.1.3.2 Consequences for the economy in general: 14 1.1.3.3 Consequences for customers: 14 1.1.4 Types of credit risk: 14 1.1.4.1 Based on the cause of the risk: 14 1.1.4.2 Based on the customer's ability to repay: 15 1.1.5 Indicators used to measure credit risk: 15 1.1.5.1 Non-Performing loan: 15 1.1.5.2 Allowance for Credit Losses: 16 1.2 Factors affecting the credit risk of commercial banks: 17 1.2.1 Macro factors: 17 1.2.1.1 Economic growth: 17 1.2.1.2 Inflation rate: 18 1.2.1.3 Unemployment rate: 18 1.2.2 Micro factor: 19 1.2.2.1 Bank’s size (SIZE): 19 1.2.2.2 Rate of return on equity (ROE): 19 iii 1.2.2.3 Loan to Deposit (LDR): 20 1.2.2.4 Leverage ratio (LEV): 20 1.2.2.4 Net interest margin (NIM): 21 1.2.2.5 Operating expenses ratio (OER): 22 CONCLUSION OF CHAPTER 22 CHAPTER 2: MODEL BUILDING AND RESEARCH METHODS 23 2.1 Research models: 23 2.2 Building dependent and independent variables in the research model: 23 2.2.1 Dependent variable: 23 2.2.2 Independent variables: 24 2.2.2.1 Bank internal factors: 24 2.2.2.2 Bank external factors: 25 2.3 Research hypothesis: 26 2.4 Verification Model: 27 2.5 Research Methods: 27 2.5.1 Statistical analysis: 27 2.5.2 Correlation analysis: 28 2.5.3 Regression analysis: 28 2.5.2.1 Multicollinearity test: 29 2.5.2.2 Heteroscedasticity test: 29 2.5.2.3 Autocorrelation test: 29 2.6 Research Process: 30 2.7 Research data source: 30 2.7.1 Research data source: 30 2.7.2 Research sample: 31 2.8 Model research results: 32 2.8.1 Descriptive statistics: 32 2.8.2 Autocorrelation analysis: 34 2.8.3 Testing for violation of regression assumptions: 35 2.8.3.1 Checking for Multicollinearity: 35 2.8.3.2 Checking for Autocorrelation: 36 2.8.3.3 Checking for Heteroscedasticity: 36 iv 2.8.3.4 Summary of test results: 37 2.8.4 Comparison between two models: Fixed effects model and Random effects model: 37 2.8.5 Fixed effects model defect testing: 39 2.8.5.1 Checking for Autocorrelation on FEM model: 39 2.8.5.2 Checking for Heteroscedasticity on FEM model: 39 2.8.5.3 Summary of test results: 40 2.8.6 Research results: 40 2.9 Discuss research results: 41 CONCLUSION OF CHAPTER 44 CHAPTER 3: CURRENT SITUATION OF CREDIT RISK AND SOLUTIONS TO LIMIT CREDIT RISK AT COMMERCIAL BANKS IN VIETNAM 46 3.1 Overview of activities of Vietnamese commercial bank: 46 3.2 Current status of credit risk of Vietnamese commercial banks: 49 3.2.1 Credit growth rate: 49 3.2.2 Non – Performing loan: 53 3.3.1 Solution from Commercial Bank: 57 3.3.1.1 Solution based on the results of the research model: 57 3.3.1.2 Solutions to improve lending activities and credit risk management: 58 3.3.2 Solutions from the Government and State Bank: 60 CONCLUSION OF CHAPTER 63 CONCLUSION 64 REFERENCES 65 v LIST OF ABBREVIATIONS ACRONYMS CONTENT ABBREVIATIONS NPL Non-performing Loan LDR Loan-to-deposit Ratio NIM Net Income Margin UNP Unemployment OER Operating Expense Ratio INFL Inflation Rate FEM Fixed effect model GLS Generalized Least Squares GDP Gross Domestic Product OLS Ordinary Least Squares REM Random effect model ROE Return on Equity vi LIST OF TABLES Table 2.1: List of 21 Vietnamese commercial banks in research data 32 Table 2.2: Descriptive statistics for the variables 33 Table 2.3: Results of autocorrelation analysis of variables 34 Table 2.4: Test results for multicollinearity between independent variables 35 Table 2.5: Test results for correlation between independent variables 36 Table 2.6: Test results have no correlation between independent variables 36 Table 2.7: Fixed effects model 37 Table 2.8: Random effects model 38 Table 2.9: Hausman test results 38 Table 2.10: Test results for correlation between independent variables 39 Table 2.11: Test results for heteroscedasticity between independent variables 39 Table 2.12: Fix Autocorrelation, Heteroscedasticity by Generalized Least Square (GLS) method 40 Table 2.13: Regression results of factors affecting credit risk 41 Table 3.1: Assets and capital of commercial banks in Vietnam as of December 31, 2021 48 Table 3.2: Capital adequacy ratio of credit institutions 49 LIST OF FIGURES Figure 2.1: Research process 30 Figure 3.1: Credit growth rate in Vietnam from 2016 to 2021 49 Figure 3.2: Non-Performing ratio and Credit growth rate in Vietnam from 2016 to 2021 54 vii INTRODUCTION Reasons for choosing the topic: The banking industry plays a lifeline role in the economy, holding many extremely important functions for the economic development of Vietnam Commercial banks today not only operate for the purpose of making profits but also provide capital for the economy, act as a bridge between businesses and the mark et, shorten the circulation of goods and money, contributes to the increase of operational efficiency of the economy Credit activities are clearly the major business activities and the primary source of income for most Vietnamese commercial banks nowadays Through data from many reports of commercial banks from 2016 to 2021, we can see that this is a profitable activity that accounts for a significant amount of the income structur e (about more than 70%), and credit development is recognized by the whole in dustry, which Banks and the Government put priority However, the hotter the growth, the greater the associated risks Indeed, credit risk is always the primary issue and challenge that commercial banks face Credit risk can result in financial loss, a decrease in the market value of a bank's capital, and, in more catastrophic circumstances, a loss in the bank's operations or a loss of money Bankruptcy led to the collapse of the banking system of the whole economy On the other hand, if risk reduction in credit activities is well managed and implemented, it will benefit the bank in a variety of ways, including cost reduction, improved income, capital preservation for commercial banks, creating trust information for depositors and investors, and creating a foundation to expand the market and increase the bank's reputation, position, image, and market share, all of which are signs of good financial health Therefore, minimizing risks in credit activities is necessary and must be prioritized to ensure long-term stability and safety for the entire banking system Realizing the importance of credit risk in the banking business, the author has selected to conduct the topic "Factors affecting credit risk of Vietnamese commercial banks" to find out, understand and analyze more closely the influence of Factors influencing bank’s credit risk, thereby proposing solutions to the Government, SBV, commercial banks to limit credit risk, contributing to stabilizing the banking system in Vietnam Objectives of the study: 2.1 Overall objectives: The overall objective of the study is to find and study the factors affecting credit risk at Vietnamese commercial banks in the period 201 - 2021, thereby proposing solutions to limit credit risks in order to improve Vietna m's banking system 2.2 Specific goals: - Identify the factors that can affect credit risk in Commercial banks in Vietnam and measure the influence of these factors - Analysis of the current situation of credit risk at Vietnamese commercial banks - Proposing appropriate solutions to minimize credit risks at Vietnamese commercial banks Research question: - What factors can affect Vietnamese commercial bank's credit risk? - How influential are factors of banking characteristics on credit risk of Vietna mese commercial banks? - What solutions to limit credit risk in the system of commercial banks in Vietnam? Objects and scope of research: 4.1 Objects: The dissertation's focus is on the factors that influence Vietnam Commercial Bank's credit risk 4.2 Scope of research: The thesis focuses on research at 21 Vietnamese commercial banks in the period from 2016 to 2021