ABSTRACT This research study aims to examine the impact of capital adequacy ratio CAR on credit growth in commercial banks in Vietnam, along with other factors, including bank size, liqu
RESEARCH BACKGROUND
Research introduction
Between 2008 and 2020, the world faced two significant crises and economic recessions, with the COVID-19 pandemic inflicting damage over four times greater than the 2009 global financial crisis (Foroni et al., 2020) In Vietnam, economists anticipate a rise in the bad debt ratio, especially following the expiration of Circular 14/2021/TT-NHN issued by the State Bank of Vietnam.
Commercial banks play a crucial role in a country's economic development, necessitating their preparedness for unpredictable shifts in national and global economies To ensure compliance with international standards, the government has established laws and regulations that commercial banks must implement early on Among these, maintaining adequate capital levels is vital for safeguarding banks against capital risk Bateni et al (2014) emphasized that capital safety regulations are essential for banking safety, while Ngo (2006) found no correlation between the capital safety ratio and the profitability of Vietnamese commercial banks from 1996 to 2005 under Basel I regulations According to Circular 41/2016/TT, the State Bank of Vietnam set a minimum capital safety ratio of 8% under Basel II, which increased to 9% under Basel III as per Circular 22/2019/TT.
In the Vietnamese commercial banking system, credit activities are essential, contributing approximately 70%–80% of banks' profits Sustainable credit growth is vital for ensuring a stable and secure income stream for banks Consequently, bank managers must recognize the factors influencing credit growth Despite commercial banks' capital representing only about 5% of total capital, it plays a critical role in fulfilling irreplaceable functions The objective of enhancing profitability through increased credit growth remains a key focus for banks.
The increasing pressure on bank liquidity has led to a competitive rise in deposit interest rates, elevating capital usage costs To avert bank failures and safeguard depositor interests, commercial banks must prioritize the capital adequacy ratio in line with Basel standards Key risks such as credit, liquidity, and operational risks threaten capital safety The State Bank of Vietnam is currently implementing Basel II standards to establish capital norms that mitigate commercial bank risks and enhance the financial system, thereby fostering sustainable credit growth However, challenges related to capital and credit activities may arise during this implementation phase Understanding the interplay between the capital adequacy ratio and credit growth is crucial for managers in shaping effective policies and strategies for development.
The capital adequacy ratio (CAR) has become a focal point of research in Vietnam as scholars seek to establish an appropriate CAR for commercial banks Serving as a critical safety measure, the CAR is defined by international banking regulations and is vital for assessing the risk levels of banks It informs depositors about potential risks and enhances the stability and efficiency of the banking system By analyzing the CAR, investors can evaluate a bank's capacity to repay debts and manage risks, ensuring that banks with adequate CAR can withstand financial shocks and safeguard their customers Consequently, the CAR significantly influences the credit growth of commercial banks While stringent capital requirements can enhance the banking system's stability and bolster market trust, they may also impact banks' capacity to expand credit.
Increasing capital requirements for commercial banks raises their capital costs when issuing credit, as higher minimum capital requirements correlate with an increase in risky assets, ultimately limiting their ability to provide credit to the economy (Heuvel & Skander, 2008) According to Bernanke and Lown (1991), equity capital is significantly more expensive than liabilities, prompting banks to hold fewer high-risk convertible assets like loans As a result, a higher Capital Adequacy Ratio (CAR) leads to reduced credit availability in the economy Conversely, a lower CAR poses substantial risks to both the bank's operations and the overall banking system Thus, achieving a balance between CAR and credit growth is essential for the stability of commercial banks.
In summary, the Capital Adequacy Ratio (CAR) plays a vital role in ensuring the safety and stability of the banking system, with its impact on credit growth being intricate and necessitating thorough evaluation by both policymakers and researchers.
Research statement
The relationship between the Capital Adequacy Ratio (CAR) and credit growth is vital for effective capital management in commercial banks While banks often boost credit growth to enhance profits, this practice can strain liquidity, prompting a rise in deposit interest rates and capital costs Consequently, adhering to Basel standards for capital adequacy becomes essential Commercial banks face various risks, including credit, liquidity, and operational risks, all of which influence their capital adequacy Although numerous studies have explored the factors affecting CAR, empirical findings regarding its impact on credit growth remain inconsistent globally.
Numerous global studies have examined the relationship between capital adequacy ratios and credit expansion Zhao (2006) analyzed how capital regulation influences the credit growth of Chinese commercial banks.
Between 1995 and 2003, regulatory minimum capital requirements did not notably hinder loan growth in China's commercial banking sector (Zhao, 2007) A study by Bridges et al (2014) on the UK banking sector from 1990 to 2011 revealed that macroprudential capital requirements influence both bank capital ratios and lending behaviors, prompting banks to adjust their capital buffers and lending patterns In Kenya, Wachiuri (2016) analyzed data from 43 commercial banks from 2001 to 2011 and found that the capital adequacy requirements under Basel 1 negatively impacted credit creation, especially during periods of heightened requirements in 2000 and 2009 Additionally, the Central Bank of Kenya's incremental adjustments to capital adequacy requirements led to shifts in credit creation trends approximately every four years (Wangui).
Previous research on capital requirements and lending behavior has been conducted across various countries and time periods, highlighting a gap in understanding the nuanced effects of these requirements This lack of exploration considers differing economic conditions and the potential diversity among commercial banks.
Previous research in Vietnam has examined various factors influencing the credit growth of commercial banks, including studies by Yen (2019) and Thuan (2021) Additionally, some investigations have focused on the relationship between the Capital Adequacy Ratio (CAR) and other banking operations, like profitability and bankruptcy risk (Ngan et al., 2021) However, there is a notable gap in the literature, as no specific studies have addressed the impact of the CAR ratio on the credit growth of Vietnamese commercial banks.
This study aims to provide empirical evidence on the impact of the Capital Adequacy Ratio (CAR) on credit growth in Vietnamese commercial banks from 2010 to 2022 It will analyze changes in legal regulations related to the CAR ratio over time, offering insights into the relationship between CAR and credit growth The findings will assist banking managers in making informed decisions about capital adequacy management, enhancing their operational strategies.
Research objectives
This research investigates the impact of the capital adequacy ratio (CAR) on credit growth in Vietnamese commercial banks from 2010 to 2022 The findings aim to offer valuable insights for bank managers and policymakers to develop strategies that promote credit growth and profitability while maintaining a sustainable CAR.
To analyze theories and framework on the impact of CAR on credit growth of commercial banks
To evaluate the impact of CAR on the credit growth of commercial banks in Vietnam from 2015 to 2022
To provide managerial implications for banking managers to manage CAR and leverage CAR for credit growth of commercial banks.
Research questions
Based on research objectives mentioned above, the research purposes to find out answers for following research questions:
What are theories and frameworks on the impact of CAR on credit growth of commercial banks?
How CAR impacts on the credit growth of commercial banks in Vietnam from
What are recommendations for banking managers to manage CAR and leverage CAR for credit growth of commercial banks?
Research scope
Space: This research focuses on commercial banks in Vietnam The sample includes 20 commercial banks with different characteristics in terms of scale, ownership nature, and business model
Time: the time range for this research is from 2010 to 2022.
Research methodology
This study employs a mixed-methods approach, combining qualitative and quantitative research to establish a robust foundation The qualitative analysis gathers and examines theoretical frameworks from prior empirical studies, while the quantitative aspect utilizes the GMM estimation model on panel data to assess the influence of capital sources on the credit growth of Vietnamese commercial banks from 2010 to 2022 This optimized model effectively addresses challenges related to endogeneity, heteroscedasticity, and autocorrelation.
Information is gathered from the publicly available financial statements of 20 commercial banks in Vietnam spanning the period from 2010 to 2022
Stata software is used to process data for analysis After data collection, data cleaning and verifying are implemented, then data are input into Stata to process for results.
Research structure
To reach the research objectives and find out answers for research questions, the study is structured into 5 chapters as following:
Chapter 1: Research background: offers an introductory overview of the research, presenting the problem statement, objectives, research queries, scope, and methodology employed in the investigation
Chapter 2 provides a comprehensive literature review on the capital adequacy ratio (CAR) and its significance in the banking sector It explores the relationship between CAR and the credit growth rate, identifying key factors that influence credit expansion in commercial banks Additionally, the chapter examines previous studies that analyze the impact of CAR on credit growth, culminating in the presentation of a proposed research model to further investigate these dynamics.
Chapter 3: Research methodology: describes research methods, research model, data collection and data analysis
Chapter 4: Findings and Discussion examines the current capital adequacy ratio (CAR) and credit growth rate of commercial banks in Vietnam This section presents key findings derived from descriptive and regression analyses The chapter concludes with a comprehensive discussion of these research findings, highlighting their implications for the banking sector.
Chapter 5 offers key recommendations derived from the research findings, summarizing the main results and acknowledging the study's limitations Additionally, it outlines potential directions for future research, providing a comprehensive conclusion to the study.
LITERATURE REVIEW
The concept of capital adequacy ratio (CAR)
The Capital Adequacy Ratio (CAR) is a crucial regulatory measure established by the Basel Committee on Banking Supervision to ensure banks maintain sufficient capital to mitigate various risks (Basel, 2017) Introduced in the Basel Accords, CAR aims to enhance the stability and integrity of the global financial system, reflecting the Basel Committee's role as a global standard-setting authority in banking regulations.
The Capital Adequacy Ratio (CAR) is determined by assessing a bank's regulatory capital against its risk-weighted assets, effectively measuring the relationship between the bank's capital and its exposure to various risks, including credit, market, and operational risks The calculation of CAR is essential for ensuring financial stability within the banking sector.
CAR = (Regulatory Capital) / (Risk-Weighted Assets)
The Basel framework defines specific categories of regulatory capital, referred to as tiers, which are essential for calculating the Capital Adequacy Ratio (CAR) These tiers are structured to guarantee that the capital supporting a bank's operations is of high quality and stability, with the two primary tiers being crucial for this purpose.
Tier 1 Capital: This is the core capital of a bank, including common equity and retained earnings Tier 1 capital is the most reliable form of capital and can effectively absorb losses
Tier 2 capital encompasses various forms of financial resources, including subordinated debt and hybrid instruments While it offers extra capacity to absorb losses, it is regarded as less stable compared to Tier 1 capital.
The Basel Accords, particularly Basel III, have established specific minimum capital adequacy ratios that banks are required to meet Basel III sets a minimum common equity
Tier 1 (CET1) capital ratio, which is a subset of the overall CAR This minimum CET1 ratio serves as a crucial benchmark to ensure banks have sufficient high-quality capital to weather adverse economic conditions
In 1999, Vietnam established its first CAR coefficient through Decision No 297/1999/QD-The State Bank of Vietnam, mandating a minimum capital safety ratio of 8% for credit organizations, though its calculation method was simplistic and did not fully align with Basel I This was followed by Decision No 457/2005/QD, which detailed various safety ratios, including the capital safety ratio, credit limits, and repayment capacity ratios, requiring banks to enhance their ratios over three years By the end of 2019, 18 commercial banks had adopted Circular No 41/2016/TT, aligning with Basel II standards for risk management, which set a capital adequacy ratio minimum of 8% Furthermore, Circular No 22/2019/TT raised this minimum to 9% for banks adhering to its calculation guidelines.
The CAR framework enables regulatory authorities to ensure banks maintain sufficient capital to withstand potential losses, thereby minimizing insolvency risks and bolstering the financial system's stability By offering a standardized measure, it facilitates international comparisons and promotes a fair competitive environment for banks across various jurisdictions.
2.1.2 The importance of CAR at commercial banks
Capital safety is a crucial indicator of a bank's financial health, reflecting its ability to endure unexpected losses and manage financial leverage effectively (Aspal & Nazneen, 2014) The Capital Adequacy Ratio (CAR) serves as a key metric for assessing a bank's capital safety, indicating its overall soundness and capacity to absorb operational losses (Bateni et al., 2014; Dang, 2011; Aspal & Nazneen, 2014) Furthermore, maintaining surplus capital is essential for daily operations and future growth (Abusharba et al., 2013) Adhering to regulatory capital levels helps banks prevent failures and manage losses effectively (Abusharba et al., 2013; Aspal & Nazneen, 2014).
The capital adequacy ratio is a key indicator of a bank's ability to withstand losses during crises, directly linked to its return on equity (ROE) and net interest margin (NIM) A higher capital adequacy ratio signifies stronger bank resilience, ensuring operational stability and safeguarding the interests of shareholders, investors, and depositors The Basel Committee on Banking Supervision sets international standards for calculating this ratio, recommending that banks maintain a minimum capital adequacy ratio of at least 8% to promote financial system stability and efficiency.
However, this ratio differs in some countries due to regulations from the central bank, financial management, and supervision agencies of the respective countries For example,
In Egypt, the minimum capital adequacy ratio (CAR) is set at 10%, while in Vietnam, it is 9% for banks under Circular No 22/2019 and 8% for those under Circular No 41/2016 India also maintains a minimum CAR of 9% The CAR serves as a crucial indicator of the relationship between a bank's equity capital and its risk-weighted assets Proper capital management standards are essential for the stable operation of commercial banks, as they help mitigate bankruptcy risks and enhance liquidity, ultimately leading to increased future profits Additionally, effective risk management tools are vital for banks to adapt to unpredictable economic changes, ensuring their profitability and sustainability.
The concept of credit growth rate
2.2.1 Definition of credit growth rate
The evolution of credit reveals its dual role as both an economic sphere and a byproduct of the commodity production system, developing in tandem with the commodity economy and serving as a vital catalyst for its advancement Credit manifests through various socio-economic forms, fundamentally defined as the provision of financial resources by a lender to a borrower, with a commitment to repayment within a specified timeframe, typically involving interest Bank credit, in particular, can be characterized as an asset transaction where a bank lends resources to borrowers, such as businesses or individuals, who are obligated to repay the principal and interest as per their agreement.
Credit growth in commercial banks is driven by policies aimed at increasing mobilized capital to meet the demand for credit issuance, discounting, and investment in both economic organizations and individuals This strategic growth not only enhances profitability but also boosts market share and brand presence In Vietnam's commercial banking system, credit is the primary revenue source, making credit activities vital for financial institutions Sustainable and high-quality credit growth is essential for ensuring stable and secure income for banks.
The formula for calculating the credit growth rate is as follows:
Credit growth rate = (total credit balance this period minus total credit balance last period) / total credit balance last period
There are three main sources of capital that can be mobilized for investment in development and credit growth They are:
State capital sources: state budget, capital in state-owned enterprises, public assets, national assets
Capital sources in the population: savings in households in the form of money or valuable assets such as gold, silver, gems, antiques, etc
Foreign investment capital encompasses various sources, with Official Development Assistance (ODA) being a key form often referred to as aid capital ODA typically consists of interest-free or low-interest loans that come with extended repayment periods Additionally, foreign investment includes other avenues such as commercial loans and remittances from overseas Vietnamese, alongside Foreign Direct Investment (FDI).
2.2.2 The importance of credit growth rate at commercial banks
Credit itself and credit growth play crucial roles in three different aspects
Bank credit is essential for economic growth and job creation by efficiently allocating financial resources, transforming idle funds into productive business tools It provides timely capital to meet business needs, fostering continuous production, expansion, and technological advancement, which in turn enhances labor productivity Additionally, bank credit enables the state to regulate the economy by investing in priority sectors, promoting structural efficiency and development It also plays a crucial role in currency circulation and stabilization through interest rate management, while enhancing international economic relations via foreign credit activities that build trust among trade partners and facilitate the flow of goods in international markets.
Bank credit effectively addresses customers' capital needs by offering diverse advantages, including flexible terms, various borrowing purposes, and easy access to substantial funds This financial support enables investors to capitalize on business opportunities and enhance profit margins while improving the overall efficiency of capital utilization Businesses gain an additional funding source, which they must manage responsibly to meet repayment obligations The adaptable nature of bank credit, with its flexible time frames and interest rates, encourages businesses to creatively and strategically utilize capital to maximize returns during different periods.
Credit is essential for banks, constituting approximately 70% of their total assets and generating 70% to 80% of their income By engaging in credit activities, banks can enhance their service offerings, including payments, cards, deposits, foreign exchange, securities, consulting, and insurance This diversification not only boosts profits but also mitigates risks for financial institutions.
High-quality credit growth is essential for enhancing credit operation efficiency, as it aligns with the State Bank's capital safety standards and ensures that borrowers utilize funds for their intended purposes This approach facilitates timely capital and interest recovery while minimizing the risk of capital loss To achieve high efficiency, it is vital to balance credit growth rates with credit quality, ensuring that growth does not surpass the bank's capital, human resources, and technological capabilities Excessive credit growth can jeopardize the bank's solvency, diminish credit quality, and negatively impact operational efficiency, potentially leading to losses Therefore, effective management policies addressing both macroeconomic and internal bank issues are crucial for sustainable credit growth and the overall development of the bank.
Factors affecting the credit growth rate at commercial banks
2.3.1 Macroeconomic factors of the country
Commercial banks play a crucial role in transferring capital in the economy and are one of the main entities that help the State Bank of Vietnam implement its monetary policies
Macroeconomic factors play a crucial role in influencing the credit growth rate of commercial banks Research, including a study by Guo, Stepanyan, and Guo (2011), has identified key elements affecting credit growth in commercial banks within emerging economies from 2001 to 2010 Their findings indicate that both domestic and foreign financing sources significantly enhance the credit growth of these banks.
Vu and Nahm (2013) analyzed key macroeconomic factors, including real GDP per capita growth, inflation rates, interest rate spreads, and financial market development Pouw and Kakes (2013) explored the effects of macroeconomic variables on the operations of 28 banks across different countries, focusing on GDP, unemployment rates, interbank interest rates, and annual inflation Imran and Nishat (2013) examined the supply side by investigating the growth rates of bank credit to the private sector in Pakistan, revealing that foreign debts, domestic deposit growth, economic growth rates, and exchange rates significantly influence bank credit growth.
In their 2015 study, Mileris analyzed the macroeconomic factors influencing commercial banks in Lithuania during the economic recession of 2009-2010 Similarly, Sharma and Gounder (2012) investigated the determinants of credit growth in six South Pacific economies, revealing that loan interest rates and inflation negatively affected bank credit growth, while deposit growth and bank asset size had positive influences Additionally, Singhn and Sharma (2016) explored the effects of GDP, inflation rate, and unemployment rate on the operations of commercial banks in India, highlighting the importance of these monetary policy objectives.
Duong and Yen (2011) identified a negative relationship between the average interest rate differential and the credit growth of commercial banks in Vietnam Additionally, Loc and Thep (2015) highlighted that the credit growth rate of people's credit funds in the Mekong Delta region is influenced by economic growth and inflation factors.
In summary, macroeconomic factors affecting the credit growth of commercial banks include interest rates, GDP growth, and the inflation rate, as revealed by domestic and foreign studies
2.3.2 Internal factors of commercial banks
Internal factors within banks play a crucial role in influencing the credit growth rate of commercial banks, alongside macroeconomic elements Aydin (2008) examined the effects of bank ownership, return on assets (ROA), and the disparity between lending and deposit interest rates on credit growth in Central and Eastern Europe Similarly, Tracey and Leon (2011) highlighted the significance of capital increase rates, safe loan growth, and deposit growth in determining credit levels in Jamaica and Trinidad and Tobago Various studies, including those by Phuoc (2017), Tan (2012), and Duong and Yen (2011), have developed models to analyze factors affecting credit growth across different economic phases, primarily focusing on capital growth rate, liquidity, net profit/owner's equity, and net interest income ratio Guo and Stepanyan (2011) identified foreign debt and domestic deposit volumes as impactful internal factors, while Tamirisa and Igan (2006) noted the influence of economic growth, bank ownership, and liquidity on credit growth Duong and Yen (2011) confirmed that deposit growth and liquidity positively affect commercial banks' credit growth Key internal factors affecting credit growth include the deposit capital ratio, bad debt ratio, owner's equity ratio, liquidity ratio, and bank size.
Previous research on the impact of CAR on credit growth at commercial banks
2.4.1 Previous research and studies on the impact of CAR on credit growth rate at commercial banks
Research on higher capital requirements has primarily examined their effects on lending and real economic activity While many studies analyze the impact of bank capitalization, rather than direct capital requirements, the relationship between varying capital ratios and capital requirements is often oversimplified This oversimplification arises from historical data limitations and a lack of observed changes in capital requirements, leading to potential inaccuracies in understanding their true impact.
Increasing a bank's capital can lower its risk and borrowing costs, as demonstrated by Modigliani and Miller (1958), who argued that under ideal conditions, the benefits of increased capital outweigh any potential rise in financing costs In real-world scenarios, studies show that deviations from the Modigliani-Miller theorem indicate a minimal effect of capital requirements on lending rates, primarily due to tax advantages associated with debt Specifically, a rise in capital requirements beyond 1 percentage point correlates with a 2-point increase in the basic rate (Kashyap et al., 2010; Miles et al., 2011), while more constrained assumptions suggest impacts of up to 13 basis points (Elliott, 2009; Bank for International Settlements, 2010) Given the challenges in estimating stability impacts, many studies utilize model adjustments, with the Modigliani and Miller bias serving as a key parameter to assess how increased capital requirements influence overall bank financing costs These model findings generally align with results from field experiments.
Prior to the 2008-2009 financial crisis, research primarily examined the relationship between bank lending and capital, largely overlooking capital requirements and focusing on credit issues from the early 1990s (Bernanke et al., 1991; Hancock & Wilcox, 1993, 1994; Peek & Rosengren, 1995) However, post-crisis, the link between bank capital requirements and lending became more prominent, particularly as concerns arose that financial troubles tied to mortgage-backed securities could significantly affect lending practices of US banks For example, Albertazzi and Marchetti (2010) found evidence indicating a reduction in credit supply in Italy due to inadequate bank capital requirements and limited liquidity in the aftermath of the Lehman Brothers collapse.
In recent years, macroprudential policy has become increasingly significant in regulatory reforms designed to avert crises similar to the 2008-2009 financial downturn A key component of this policy is the implementation of capital requirements Research by various scholars has examined how the minimum capital adequacy ratio (CAR) influences the credit growth of commercial banks following the 2008 financial crisis, leading to three distinct conclusions regarding the relationship between CAR and credit expansion.
Increased capital requirements can adversely affect bank lending, as evidenced by studies from Aiyar et al (2014), Bridges et al (2015), and De-Ramon et al (2016), which utilized detailed micro-level datasets for UK banks Aiyar et al (2014) revealed that regulated banks reduced lending growth by 6-8 percentage points in the long run to comply with a 1 percentage point increase in capital requirements, while simultaneously noting a significant increase in lending by overseas branches not subject to UK regulations Bridges et al (2015) highlighted that capital requirements influence banks' capital adequacy ratios and temporary credit supply, as banks gradually rebuild surplus capital while boosting lending growth This relationship underscores the impact of higher capital requirements on lending to commercial real estate and businesses.
A 1 percentage point increase in capital requirements can affect bank lending growth by 1 to 8 percentage points, depending on the loan category (Bridges et al., 2014) Research by De-Ramon et al (2016) indicates that while higher capital requirements negatively influence bank lending and asset growth, they positively affect the bank's capital ratio, even when surplus capital is high Their findings reveal that banks tend to rebuild surplus capital but only achieve about 90% of the changes in their capital requirement in the long run, highlighting the concept of a bank's capital target.
Research indicates that high capital ratios can negatively impact bank lending Studies by Nicolo (2015), Noss and Toffano (2016), and the Bank for International Settlements (2010) highlight that alterations in the equity capital-to-assets ratio adversely affect both lending practices and overall bank operations over time Nicolo emphasizes that these changes reflect shifts in capital requirements without accounting for surplus capital Noss and Toffano's 2014 analysis, utilizing a "top-down" approach with aggregate data and a VAR model, reveals that increasing the equity capital ratio during prosperous periods significantly reduces lending, especially for corporate loans Their findings corroborate Nicolo's observations regarding the influence of capital ratio changes on lending dynamics.
In 2010, the CET ratio, which assesses the proportion of total equity to higher weighted debt, significantly influenced the interest rate spread for loans and overall loan volume The research revealed that a 1 percentage point rise in the CET ratio over four years resulted in a 1.4% reduction in loan volume over 18 quarters and a 1.9% decline over 32 quarters.
The average transition phase lasts 26 quarters, which is crucial for implementing higher capital requirements A shorter transition may lead banks to cut credit supply to swiftly boost their capital ratios, while a longer phase allows them to rely on retained earnings or issue new shares, minimizing the impact on credit availability (Bank for International Settlements, 2010).
Research by Berrospide and Edge (2010) indicates that higher capital ratios significantly enhance bank lending Analyzing data from US bank holding companies from the early 1990s to the 2008 financial crisis, they found that various capital ratios, including the owner's equity to total assets ratio and the risk-based Tier 1 capital ratio, positively influenced credit growth Their findings suggest that increased bank capital correlates with a greater supply of credit, with impacts ranging from 0.25 to 2.75 percentage points.
Inconsistencies exist in the relationship between higher capital ratios and bank lending, with varying factors influencing changes in capital ratios across different groups An increase in capital ratios driven by heightened capital requirements, without a corresponding rise in capital debt, can negatively affect bank lending This occurs as banks aim to minimize financing costs associated with lending through capital.
An increase in the capital ratio due to profit accumulation, while capital requirements remain unchanged, leads to a rise in the bank's capital debt This situation allows for the expansion of the supplementary accounting balance sheet, ultimately enhancing the bank's ability to lend.
Malovana and Frait (2017) found that the relationship between the credit-to-GDP ratio and actual GDP growth fluctuated with banks' increased asset capital ratios Their analysis, conducted using a VAR time series model across six European countries, revealed that higher capital ratios introduced uncertainty in responses Consequently, the bank's capital ratio may not consistently serve as a reliable indicator for capital requirements, functioning effectively only under certain conditions.
The relationship between capital requirements and a bank's sufficient capital ratio is nuanced, particularly for banks like those in the Czech Republic, which often maintain capital adequacy ratios above regulatory standards, leading to a capital surplus (Malovaná & Frait, 2017) Research by Pfeifer et al (2019) highlights the importance of this capital surplus in shaping banks' responses to regulatory reforms While increased capital requirements may reduce a bank's capital adequacy ratio by utilizing surplus capital, banks with intentional capital surpluses for future asset expansion may instead raise their ratios to preserve this surplus Understanding the distinction between intentional and unintentional capital buffers is crucial for analyzing how banks react to heightened capital requirements Banks often signal their intentions to adjust capital reserves in advance, enabling proactive measures before additional capital needs arise Depending on the size of their unintentional capital buffers, banks may either maintain or adjust their capital adequacy ratios through various strategies, including reducing intentional buffers or rebuilding them over time Ultimately, higher capital requirements can hinder credit growth, particularly for banks that have designed capital buffers to support expansion plans.
28 intentional capital buffers over the long run and restore credit growth, as shown by Bridges et al (2015), Berrospide & Edge (2010), and Adrian & Shin (2010)
In Vietnam, Thuan (2021) found that a 1% annual increase in mobilized capital growth leads to a 0.12% rise in credit growth for commercial banks Banks, acting as intermediaries, rely on sufficient mobilized capital to expand lending capabilities and attract new clients Previous models by Phuoc (2017) and Duong and Yen (2011) identified key factors influencing credit growth, such as capital growth, liquidity, and net profit-to-owner's equity ratios, with the first three positively correlating with credit growth, while net interest income ratio has an adverse effect Quynh (2017) analyzed data from 25 Vietnamese banks between 2007-2014, confirming that mobilized capital growth significantly affects credit growth The study highlights the importance of sustainable credit growth, emphasizing adherence to Basel standards for capital adequacy.
Proposed research model
In order to evaluate the impact of the CAR coefficient on the credit growth of Vietnamese commercial banks, the author proposes using the following model:
Credit Growth it = β1CreditGrowth i-1,t + β2CAR i-1,t + β3X i-1,t + μ t + ε i,t (1)
Here, i is the bank index and t is the time index
This study analyzes the credit growth rate of commercial banks in Vietnam, represented by the variable Credit Growth i,t, which measures the annual growth rate of credit balances from year t to year t-1 The primary focus of the research is on the minimum capital adequacy ratio of commercial banks, denoted as CAR i,t, serving as the key explanatory variable.
This study examines the influence of various characteristics of commercial banks on credit growth, incorporating factors such as bank size, liquidity, return on equity, net interest margin, and financial leverage A time-fixed variable is included to account for broader economic effects on credit operations that are not captured by individual bank variables To address endogeneity concerns regarding the Capital Adequacy Ratio (CAR) and bank characteristics, explanatory variables are introduced with a one-year lag Additionally, the model incorporates the lag of the dependent variable to ensure the stability of credit operations, aligning with the methodology of Kim and Soln (2017).
The Generalized Method of Moments (GMM) is used to estimate equations (1) and (2) This method allows for overcoming potential issues such as autocorrelation, changing
The study employs the two-step system generalized method of moments (SGMM) to address issues of error variance, endogeneity, and the inclusion of lagged dependent variables as explanatory variables, as outlined by Arellano and Bover (1995) and Blundell and Bond (1998) By treating the credit growth rate, CAR coefficient, and bank characteristic variables as endogenous, this method ensures unbiased estimation results while mitigating potential biases from changing error variance and autocorrelation Additionally, the research introduces key variables and hypotheses relevant to the model.
The assessment of credit growth in Vietnamese commercial banks focuses on the annual credit expansion rate, which is crucial as these banks largely depend on credit operations for their income, with interest earnings forming a significant part of their total revenue Credit outstanding represents the largest segment of their total assets, meaning that changes in the minimum capital adequacy ratio can influence both the cost of capital and the risk appetite of these banks Consequently, such adjustments may lead commercial banks to revise their credit expansion strategies and their approach to risk when lending to customers.
The Capital Adequacy Ratio (CAR) of commercial banks is determined by legal regulations and is often supplemented by data from annual reports due to incomplete figures from S&P CapitalIQ CAR is crucial as it influences banks' credit growth; studies indicate that variations in CAR significantly affect credit volume and growth Banks maintaining a high CAR are better equipped to absorb losses, manage risks, and adhere to liquidity regulations, ultimately enhancing their lending capabilities, as evidenced by research from Kim & Sohn (2017) and Berrospide & Edge (2010).
Research indicates that a high Capital Adequacy Ratio (CAR) negatively affects the credit growth of commercial banks, as banks with elevated capital ratios exhibit reduced willingness to take on credit risks This cautious approach stems from the need to protect shareholders, who bear the ultimate responsibility in cases of bankruptcy These conclusions are corroborated by studies conducted by Nicolo (2015) and Noss and Toffano (2016) Consequently, the study introduces the following hypotheses.
H1: CAR has negative impact on the credit growth of commercial banks in Vietnam
To assess the credit operation ability of commercial banks beyond capital adequacy ratios, several key variables are considered These include the size of commercial banks, indicated by the natural logarithm of total assets (SIZE), and liquidity, measured by the ratio of highly liquid assets to total assets (LIQ) Profitability is evaluated through return on equity (ROE) and net interest margin (NIM) Additionally, the income structure is analyzed using the ratio of income from service fees to total income (NII), while financial leverage is represented by the ratio of total debt to equity (LEV).
The level of credit growth in a bank is influenced by its operational scale, which is determined by equity and network size (Aydin, 2008; Igan & Pinheiro, 2011) Larger banks benefit from a broader customer base, enhancing their lending capabilities, but they are often more cautious in lending decisions due to the potential risks associated with a diverse clientele In contrast, smaller banks, driven by profit goals, may lend more aggressively despite having fewer customers, resulting in a higher credit growth rate compared to their larger counterparts Additionally, a bank's scale significantly shapes the characteristics of its loan portfolio, with larger banks typically adopting a more conservative approach.
Wholesale lending involves providing substantial loans to large businesses, characterized by a few high-value items, while retail lending focuses on smaller amounts for individuals and small businesses, featuring numerous low-value items This distinction suggests that larger banks have greater potential for credit growth due to their scale The "too big to fail" theory indicates that large banks, crucial to the economy, compel governments to offer increased support to avert financial instability, allowing these banks to take on greater lending risks Furthermore, larger banks benefit from more capital, broader reach, advanced systems, and superior risk assessment processes, enabling them to establish ambitious credit growth targets, as supported by the research of Chernykh & Theodossiou (2011).
H2: Bank size has positive impact on the credit growth of commercial banks in Vietnam
Liquidity is crucial for banks, as it represents their ability to meet financial obligations from operations like deposit repayments and lending in a timely manner Ensuring consistent liquidity is a top priority for bank managers Research by Berrospide and Edge (2010) indicates that higher liquidity ratios can lead to lower lending capital and reduced lending rates According to commercial bank management theory, a balance between liquidity and credit is essential; banks with ample liquidity can fulfill customer withdrawal requests, build credibility, and enhance their fundraising and lending capabilities (Graeve et al., 2004; Gambacorta, 2008) Igan and Tamirisa emphasize that maintaining liquidity is vital for disbursing loans, as a high liquidity ratio indicates readiness to meet loan demands and support credit growth for economic entities (Igan & Pinheiro, 2011) Holding a significant amount of liquid assets allows commercial banks to effectively manage their financial stability.
34 risk, providing a basis for increasing lending activities, as per Cornett et al (2011) and Berrospide and Edge (2010) Based on this, the study proposes the following hypothesis:
H3: Liquidity has negative impact on the credit growth of commercial banks in Vietnam
High profitability and significant net interest margins in commercial banks can motivate increased lending to enhance business efficiency; however, such profitability may also signal higher risks, prompting banks to adopt a cautious approach to credit growth (Kim and Sohn, 2017) Aydin (2008) identified key factors influencing credit growth rates in Central and Eastern European countries, including the bank's return on equity (ROE) The net interest margin (NIM) is critical for credit growth, particularly in Vietnam, where it constitutes a major portion of banks' income From 2006 to 2014, Vietnamese commercial banks reported a net interest income ratio of 70.64% (Hau & Quynh).
2016) Therefore, when the net interest margin ratio is high, indicating higher profits, the bank is motivated to increase its credit growth (Igan & Pinheiro, 2011) This study proposes the following hypothesis:
H4: ROE has positive impact on the credit growth of commercial banks in Vietnam
H5: NIM has positive impact on the credit growth of commercial banks in Vietnam
Previous studies have established that net interest income (NII) and financial leverage (LEV) significantly influence credit growth in commercial banks NII, defined as the ratio of income generated from lending services to the total income of these banks, highlights their business model and indicates their reliance on traditional credit activities versus non-interest income sources.
Financial leverage, defined as the ratio of total debt to equity, reflects a company's reliance on external capital sources This reliance can influence commercial banks' willingness to extend credit Based on previous research (Berger & Udell, 2006; Kim & Sohn, 2017; Roulet, 2018), this study proposes a hypothesis regarding the impact of financial leverage on credit expansion readiness.
H6: NII has positive impact on the credit growth of commercial banks in Vietnam
H7: LEV has negative impact on the credit growth of commercial banks in Vietnam
Below is the table to summarize the variables of the research model and its impact on the credit growth of Vietnamese commercial banks:
Table 2-1: Description of variables in the research model
Variables Abbreviation Relationship with credit growth Sources
Aydin (2008), Chernykh & Theodossiou (2011) and Igan &
(2008), Berrospide & Edge (2010), Igan & Pinheiro (2011) and Cornett et al (2011)
Return on equity ROE Positive (+) Aydin (2008), Igan & Pinheiro
Net interest margin NIM Positive (+)
Net interest income NII Positive (+) Berger & Udell (2006), Kim &
Financial leverage LEV Negative (-) Berger & Udell (2006), Kim &
FINDINGS AND DISCUSSIONS
The current situation of CAR and credit growth rate of commercial banks in
3.1.1 The current situation of CAR of commercial banks in Vietnam
As of the end of 2022, the State Bank of Vietnam reported that state-owned commercial banks had a capital adequacy ratio (CAR) of 9.04%, while joint-stock commercial banks achieved a significantly higher ratio of 12.29% Foreign banks led with a CAR of 18.61%, aligning with the regional average Notably, some commercial banks exceeded the minimum requirement of 8% set by Circular No 41, with Shinhan Bank Vietnam reporting a CAR of 17.13% and Saigonbank showing a separate ratio of 15.33% and a consolidated ratio of 17.34% (Vy, 2022).
Figure 3-1: CAR of Vietnamese commercial banks in 2022 (Source: Vy, 2022)
Additionally, three other banks have a Capital Adequacy Ratio (CAR) of 15% and above as of the end of Q3/2022: Techcombank (15.7%), HDBank (15.3%), VPBank (15%),
The Capital Adequacy Ratio (CAR) for several banks in Vietnam ranges from 12% to 14%, with SeABank at 13.49%, LienVietPostBank at 12.36%, TPBank at 12.2%, and MSB at 12.17% (Vy, 2022) From 2012 to 2016, both the average CAR ratio of the commercial banking system and listed banks consistently exceeded the regulatory minimum of 9% Additionally, there has been a noticeable upward trend in CAR ratios among commercial banks in Vietnam, highlighting a clear distinction between large and small banks.
Currently, the CAR ratio is calculated according to Circular No 41 approaching Basel II international standards, which is regulated to be at least 8% According to the
The "Restructuring the Credit Institutions System for Handling Bad Debts (2021-2025)" project aims for commercial banks to achieve a minimum Capital Adequacy Ratio (CAR) of 10-11% by 2023 and 11-12% by 2025 VNDirect Securities reports that the CAR ratio has improved significantly as banks transition towards Basel III standards and establish robust capital buffers to support future credit growth, with over 20 banks already implementing these standards.
Six banks have successfully completed all three pillars of Basel II, with some beginning to align with Basel III standards, enhancing their risk and capital management However, VNDirect highlights that Vietnam's banking sector still has a relatively thin capital buffer compared to international benchmarks, with the average Capital Adequacy Ratio (CAR) significantly lower than that of regional banks State-owned banks in Vietnam have CAR ratios only slightly above the minimum requirement, trailing behind private banks In comparison, ASEAN countries exhibit much higher CAR safety ratios, such as Indonesia at 22.6%, the Philippines at 17.2%, Singapore at 17.1%, Thailand at 19.6%, and Malaysia at 18.5%.
3.1.2 The current situation of credit growth rate of commercial banks in Vietnam
According to a report from the State Bank, from 2001-2010, credit increased by an average of about 30%, while the average domestic product (GDP) only increased by
Between 2000 and 2007, the credit-to-GDP ratio peaked at 5.3 times, indicating that five units of credit were needed to generate one unit of GDP growth However, from 2016 to 2019, this ratio decreased significantly, dropping to less than three times and falling below two times in 2018 and 2019 This trend reflects an improvement in the effectiveness of credit utilization in driving economic growth (Thuan, 2021).
Figure 3-2: Credit growth rate of Vietnamese commercial banks from 2015-2019
From 2015 to 2021, Vietnam experienced significant economic growth, with peaks in 2017 and 2018, leading to a rise in per capita GDP from $2,109 in 2015 to $2,587 in 2018, representing a 1.65-fold increase since 2011 Despite the challenges posed by the Covid-19 pandemic in 2020, per capita GDP continued to grow, reaching $2,779, approximately 1.3 times higher than in 2015 These positive economic trends have supported a stable credit growth rate of around 15%-20% across the financial system.
This study analyzes a sample of 22 commercial banks in Vietnam from 2005 to 2021, utilizing financial reports sourced from the S&P CapitalIQ database It is important to note that the data is unbalanced, primarily due to the limited number of banks publishing reports, especially prior to 2010.
From 2005 to 2021, the average credit growth rate (CG) in Vietnam was 22.5%, with a peak of 500% and a low of -99%, indicating considerable volatility, as reflected by a standard deviation of 0.43 The average capital adequacy ratio (CAR) for commercial banks during this period was 12.3, with values ranging from 3.3 to 40.2 and a standard deviation of 4.3, highlighting significant variation in CAR In contrast, the standard deviations for net interest margin (NIM) and bank size (SIZE) were relatively low at 1.3 and 0.0005, respectively, suggesting minimal fluctuations However, return on equity (ROE), liquidity (LIQ), and financial leverage (LEV) exhibited substantial variability, with standard deviations significantly exceeding 1.
Variable Observations Mean Standard deviation Min Max
To ensure the stability of the research model, the author assessed the correlation between the variables and calculated the variance inflation factor (VIF) to mitigate multicollinearity and autocorrelation issues The correlation matrix and VIF results, as shown in Table 4-2, indicate that the correlation levels among the variables do not exceed 0.8, with the highest correlation observed between bank size and liquidity at 0.82, confirming that multicollinearity does not impact the model.
CG CAR NIM ROE SIZE NII LIQ LEV
The author assessed multicollinearity in the research model using the Variance Inflation Factor (VIF), with values ranging from 1.2 to 3.4 These low VIF coefficients, averaging 2.12 and peaking at 3.4, confirm that no values exceed the critical threshold of 10 Consequently, it can be concluded that multicollinearity is not a concern among the independent variables in the model.
Table 4-4 presents the findings of the GMM regression model, which assesses how the capital safety coefficient influences credit activities across banks with diverse characteristics, including variations in bank size, return on equity, liquidity, net interest income, and financial leverage.
The results of Table 4-4 show that the model is appropriate and can be used, with a statistically significant level of 1% (Prob > F = 0.000) Endogenous variables include
The study examines the impact of key financial indicators, including the credit adequacy ratio (CAR), bank size, net interest margin (NIM), return on equity (ROE), liquidity (LIQ), and financial leverage (LEV), utilizing lagged values of these variables as instrumental variables The findings from the AR(1), AR(2), and Sargan tests confirm the model's appropriateness and the effectiveness of the instrumental variables employed.
Arellano-Bond test for AR (1) in first differences: z = -2.67 Pr > z = 0.008
Arellano-Bond test for AR (2) in first differences: z = 0.55 Pr > z = 0.582
Sargan test of overid restrictions: chi2(196) = 383.57 Prob > chi2 = 0.000
The GMM estimation model reveals a significant positive relationship between the CAR variable and credit growth, with a statistical significance level of 1% This finding aligns with the author's expectations and corroborates previous research conducted by Bernanke and Lown (1991) as well as Gambacorta and Mistrulli.
Research indicates that banks with a higher Capital Adequacy Ratio (CAR) are more resilient to losses, effectively manage risks, and comply with regulatory requirements on risk and liquidity This financial stability not only boosts their capacity to lend but also stimulates an increase in credit growth.
The findings indicate that the Return on Equity (ROE) variable positively influences credit growth, achieving statistical significance at the 1% level In contrast, the other three independent variables—liquidity (LIQ), net interest income (NII), and financial leverage (LEV)—show no statistical significance with p-values greater than 0.1 Additionally, both the net interest margin (NIM) and bank size (SIZE) variables negatively affect credit growth, which contradicts the initial expectations of the author and Berrospide (2013).
Discussions
Increasing the CAR coefficient is crucial for commercial banks as it enhances their credit growth rate, aligning with previous studies by Cornett et al (2011), Karmakar and Mok (2015), and Kim and Sohn (2017) A higher CAR coefficient reduces bankruptcy risk (Nguyen Bich Ngan et al., 2021), enabling banks to expand lending for profit Conversely, a lower CAR compels banks to tighten credit standards to mitigate bankruptcy risks and shield against economic fluctuations (Bayounmi and Malander, 2008) This was notably observed during the global financial crisis, where insufficient capital in banks triggered a credit crunch, leading to significant challenges stemming from the banking crisis (Gambacorta and Marques-Ibanex, 2011; Brei et al., 2013).
This study reveals that the influence of the capital adequacy ratio on the credit activities of banks varies by size, with small commercial banks experiencing a more pronounced effect Notably, when the capital adequacy ratio and scale variable exhibit opposite signs, the impact on small banks is more significant, indicating that they gain greater advantages from an increased capital adequacy ratio.
An increase in the capital adequacy ratio by 45% compared to large commercial banks enhances their credit growth rate and mitigates credit risks This higher ratio not only bolsters the safety of commercial banks for creditors, including depositors and bondholders, but also enables banks to lower risk premiums in lending rates.
Research indicates that a bank's scale significantly influences its credit growth, as established in previous studies (Aydin, 2008; Igan & Pinheiro, 2011) The scale of a bank is primarily determined by its equity and network, which are crucial for mobilizing and lending funds Larger banks benefit from a broader customer base, enhancing their lending and funding capabilities However, their extensive clientele makes them more cautious in lending decisions due to potential risks associated with repayment Conversely, smaller banks, with fewer customers, often prioritize profit goals, leading them to lend more freely without thorough risk assessment.
This study confirms that the return on equity (ROE) of commercial banks in Vietnam significantly impacts credit growth, aligning with Aydin's (2008) analysis Additionally, it highlights that various factors, particularly the bank's ROE, play a crucial role in influencing credit growth rates in Central and Eastern European countries.
RECOMMENDATIONS AND CONCLUSION
Recommendations
The findings reveal a positive correlation between the equity capital ratio and credit growth, highlighting the necessity for banks to implement effective strategies to enhance their equity capital levels This approach is essential for fostering future credit expansion The author outlines several policy implications to support this objective.
Issuing stocks is an effective strategy for banks to swiftly raise substantial equity capital, enhancing their charter capital and potentially generating surplus funds This approach alleviates the need for capital repayment, thereby reducing financial strain during unprofitable years However, certain considerations must be taken into account.
The scale and reputation of the bank will directly affect the cost of issuance (usually, larger and more reputable banks will have lower issuance costs)
The success rate of stock issuance is crucial, particularly for small and lesser-known banks, whose stocks often go unnoticed This lack of attention can lead to an oversupply of their shares, resulting in wasted issuance costs and damaging the bank's reputation In contrast, larger and more reputable banks can navigate this process more effectively.
In subsequent share issuance rounds, if current shareholders cannot acquire all newly issued stocks, their ownership rights in the bank will be diluted, impacting their voting rights, control over bank operations, and overall profits.
Issuing long-term convertible bonds is an effective strategy for banks to raise substantial long-term capital while preserving existing shareholders' ownership rights and income during the conversion period The value of these bonds comprises both the bond's worth and the conversion option, providing a flexible financing solution However, banks must manage the challenge of interest payments during periods of financial losses.
Thirdly, attracting strategic partners, especially foreign partners, is a wise solution to have an effective financial resource for several reasons:
With strong financial capacity of large partners, Vietnamese commercial banks can shift to a completely different and much larger capital state
This plan offers significant advantages for banks in both management and operations Strategic investors can impart valuable management experience and technical expertise to bank personnel Leveraging their modern business practices, foreign investors can enhance bank management Furthermore, banks gain access to cutting-edge technology, enabling them to improve service quality and expand their operations.
Investment from partners enhances the bank's reputation, fostering greater customer trust Furthermore, collaboration with foreign partners enables Vietnamese banks to connect and expand their market presence beyond Vietnam's borders.
Merging and consolidating small banks is a strategic solution to enhance competitiveness and attract investors, particularly as they prepare for Basel II standards In Vietnam, smaller banks face challenges due to limited operational areas and weak market presence, making them vulnerable to foreign competition While mergers can create larger banks with stronger financial resources, it is crucial to regulate the process to prevent excessive consolidation that may still leave domestic banks at a disadvantage Therefore, the government and the State Bank must carefully evaluate merger proposals to ensure a stable banking market and protect the economy from foreign dominance.
Enhancing operational efficiency is a vital long-term strategy for banks to generate substantial internal capital, reducing reliance on external capital markets and minimizing mobilization costs This approach not only lowers expenses but also preserves voting rights, preventing ownership dilution and fostering shareholder confidence in future income Achieving these goals necessitates significant commitment from banks to enhance management quality, adopt advanced technology, diversify product offerings, and reduce costs, ultimately leading to increased profits and capital reserves Furthermore, research indicates a positive correlation between liquidity and deposit capital ratios with credit growth.
To foster credit growth, banks must effectively manage liquidity and maintain high liquidity ratios This involves regularly assessing their relationships with shareholders and diversifying funding sources The funding department should explore various funding options and select those that align with current trends, ensuring a stable and robust supply of funds Additionally, establishing long-term, sustainable relationships with key suppliers, such as partners, major customers, and payment organizations, is crucial for maintaining a solid liquidity cushion during periods of liquidity challenges.
To enhance credit growth, banks must implement effective strategies to increase mobilized capital rates This involves establishing a robust customer care process that fosters trust and comfort during transactions Additionally, banks should diversify their product offerings and create tailored incentive policies to meet varying customer needs over time, thereby encouraging deposit growth Investing in advanced technology and equipment is essential for providing swift and efficient customer support Moreover, a well-planned and feasible mobilization strategy is crucial for sustaining and expanding the bank's capital sources.
Above are some policy implications to promote credit growth of commercial banks However, credit growth also needs to comply with the bank's safety regulations,
The State Bank of Vietnam is prioritizing the capital adequacy ratio (CAR) as it prepares to implement Basel II standards in the coming years To achieve this, banks must not only increase the volume of credit but also enhance its quality to minimize "risk assets." This approach will help improve the CAR ratio and ensure it remains compliant with the State Bank's regulations The author proposes several policy implications to support these objectives.
To effectively manage and reduce the bad debt ratio, banks should enhance their officers' ability to evaluate and assess customers while implementing strict regulations on lending practices This approach will help limit the volume of bad debts Additionally, banks should expand their lending scope, focusing on customers with high safety levels to mitigate risk For any remaining bad debts, it is crucial to classify and address them comprehensively Close monitoring of loans in high-risk sectors, such as large customer credit, real estate, and BOT projects, is essential to propose timely risk control measures and ensure the bank's safety.
To enhance the effectiveness of credit programs aligned with government policies, it is essential to actively collaborate with various ministries and sectors in developing and refining lending mechanisms and policies tailored to support prioritized industries.
The State Bank of Vietnam must rigorously manage credit growth and quality by reviewing deposit interest rates and implementing interest rate ceilings based on deposit terms to allow for market self-adjustment Additionally, the government should exercise caution in its monetary policies, ensuring that money supply aligns with nominal GDP growth rates Overheated credit growth that surpasses nominal GDP can increase the risks of inflation and a surge in bad debts.
Conclusion
This study analyzed the influence of the capital adequacy ratio (CAR) on credit growth among commercial banks in Vietnam, considering additional factors like bank size, liquidity, profitability, and financial leverage The research involved a sample of 22 commercial banks in Vietnam over the period from 2005 to 2021 Utilizing the GMM regression model, the study assessed how CAR affects the credit activities of banks with diverse characteristics.
The study reveals a positive correlation between the Capital Adequacy Ratio (CAR) and credit growth in Vietnamese commercial banks, indicating that banks with a higher CAR can better absorb losses, manage risks, and comply with regulatory requirements, ultimately boosting lending and credit expansion Additionally, Return on Equity (ROE) also positively influences credit growth In contrast, the other three variables—liquidity, net interest income, and financial leverage—showed no significant statistical impact, while net interest margin and bank size negatively affected credit growth, contrary to initial expectations.
The study indicates that the capital adequacy ratio and return on equity are essential for stimulating credit growth in commercial banks These insights are valuable for policymakers and banks, aiding in informed decision-making about capital requirements, liquidity management, and credit operations.
Limitations and future research
This study acknowledges several limitations that hindered a thorough evaluation of the research problem Firstly, the analysis was confined to 22 commercial banks from 2005 to 2021 due to data constraints, excluding foreign commercial banks and their branches operating in Vietnam Secondly, the research specifically examined the influence of the minimum capital adequacy ratio on the credit growth rate and overall credit risk of commercial banks, without exploring other potential factors affecting credit dynamics.
51 structure or risk level for each group/segment in the credit portfolio of commercial banks The research team plans to evaluate these limitations in future studies
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