Determinants of non performing loans in vietnamese banking system

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF NON-PERFORMING LOANS IN VIETNAMESE BANKING SYSTEM BY NGUYEN THI HONG THUONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2017 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF NON-PERFORMING LOANS IN VIETNAMESE BANKING SYSTEM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI HONG THUONG Academic Supervisor: A/PROF NGUYEN VAN NGAI HO CHI MINH CITY, DECEMBER 2017 DECLARATION I declare that the wholly and mainly contents and the work presented in this thesis (Determinants of Non-performing loans in Vietnamese Banking System) are conducted by myself The work is based on my academic knowledge as well as my review of others’ works and resources, which is always given and mentioned in the reference lists This thesis has not been previously submitted for any degree or presented to any academic board and has not been published to any sources I am hereby responsible for this thesis, the work and the results of my own original research NGUYEN THI HONG THUONG i ACKNOWLEDGEMENT Here I would like to show my sincere expression of gratitude to thank my supervisor, Ass Professor Nguyen Van Ngai for his dedicated guideline, understanding and supports during the making of this thesis His precious academic knowledge and ideas has motivated me for completing this thesis Besides, I would like to express my appreciation to the lecturers and staff of the Vietnam – Netherlands Program at University of Economics Ho Chi Minh city for their willingness and priceless time to assist and give me opportunity for this thesis completion Next, I would like to thank all of my classmates for their encouragement and their hard work, which become a good example for me to the thesis I wish all of us will graduate at the same date Lastly, I would like to express my gratitude to my families, my beloved group for their unlimited supports and encouragement They are the motivation for me to finish this course research project ii ABBREVIATION FE: Fixed-effect estimator GDP: Gross domestic product NPLs: Non-performing loans OLS: Ordinary Least Square RE: Random-effect estimator SBV: State Bank of Vietnam S.GMM: the system generalized method of the moments estimator iii ABSTRACT Credit risk is one of the elements impact on the health of banking systems and performance of economic activities Non-performing loans is the general factor presents for this bank’s credit risk There are previous researches indicate the close relations between bad debts and factors from macroeconomic environment and bank specifications This is the motivations for this paper to examine both macro and micro variables of 30 Vietnamese banks from 2006 to 2016 This dynamic panel data is estimated by the System Generalized Method of Moments The regression results support the strong evidence for the impact of macro indicators on problem loans The testing results are in accordance with several papers which indicated the negative relation with economic growth and positive correlation with lending interest rate and government debts of problem loans However, due to the type of labor force, the increase of unemployment rate will lead to the increase in bad loans in Vietnam In addition, with bank-specific factors, tests of skimping hypothesis, diversification (with proxy is banks’ size) hypothesis and procyclical credit policy hypothesis have the statistical significance in Vietnam iv CONTENTS DECLARATION i ACKNOWLEDGEMENT ii ABBREVIATION iii ABSTRACT iii CONTENTS v APPENDIX LIST OF TABLES CHAPTER 1: INTRODUCTION 1.1 Problem statements: 1.3 Research objectives: 1.4 Research questions: 1.5 Structure of Research: CHAPTER 2: LITERATURE REVIEWS 2.1 Macro-economic factors: 2.1.1 Theories: 2.1.2 Empirical review: 2.2 Bank-specific factors: Error! Bookmark not defined 2.2.1 Hypotheses: Error! Bookmark not defined 2.2.2 Empirical review: 14 CHAPTER 3: MODEL SPECIFICATION AND DATABASE 16 3.1 Model specification: 16 3.1.1 Econometric models: 16 v 3.1.2 Variable explanation: 21 3.2 Data: 25 CHAPTER 4: RESULTS AND DISCUSSIONS 26 4.1 Summary statistics: 26 4.2 Empirical results: 28 CHAPTER 5: CONCLUSIONS AND RECOMMENDATION 39 5.1 Conclusion:.………………………………………………………………… 39 5.2 Recommendations:……………………………………………………… 40 5.3 Limitations: ………………………………………………………………….41 REFERENCES 42 APPENDIX 48 vi APPENDIX Appendix 1: Correlation of variables Appendix 2: Addition estimation test with lag of variables Appendix 3: The estimated results for the regression models with separate hypotheses using system generalized method of the moments AP Page | LIST OF TABLES Table 1: Summary statistics Table 2: Results with Pooled OLS, FE, RE and SGMM estimations Table 3: Estimation results of one lag variables Table A1: Estimation without lagged variables Table A2: Estimation with lagged variables Bobba, M., 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0.0308 -0.4479*** Size Size 0.2665*** -0.0991* -0.5674*** 0.7868*** -0.8052*** -0.0726 -0.0031 0.0109 0.0045 NI 0.0595 0.0312 -0.0911 0.075 LR -0.0783 0.2108*** 0.0207 -0.127** 0.003 -0.0591 -0.5612*** 0.2846*** 0.1378** 0.1641*** 0.0182 -0.0395 0.0045 -0.9843*** 0.4293*** 0.0276 (*), (**) and (***) are the significant level at 10%, 5% and 1% respectively 48 APPENDIX II ADDITION ESTIMATION TEST WITH LAG OF VARIABLES ΔGDPit-2 ΔUNit-2 ΔLIR it-2 ΔGD it-2 IE it-2 SR it-2 Size it-2 LR it-2 ROE it-2 NI it-2 OLS FE RE SGMM -0.0029 -0.00253 -0.0029 -0.00265*** (-0.70) (-0.62) (-0.72) (-2.66) 0.0127 0.0134 0.0127 0.00674** (0.89) (1.09) (1.03) (1.97) 0.00297* 0.00287 0.00297* 0.00237*** (1.89) (1.69) (1.73) (8.67) 0.00314 0.00292 0.00314 0.00293*** (0.88) (0.80) (0.86) (4.67) -0.000446 -0.000493 -0.000446 -0.000412 (-0.68) (-0.47) (-0.45) (-0.36) 0.0515 0.0883 0.0515 -0.0135 (0.71) (0.75) (0.75) (-1.47) -0.0235 -0.0145 -0.0235 -0.0322*** (-1.10) (-0.18) (-1.38) (-3.19) 0.0519 0.0862 0.0519 -0.000638 (0.70) (0.80) (0.80) (-0.30) 0.00409 0.00285 0.00409 -0.0102 (0.25) (0.11) (0.21) (-1.23) -0.00157 -0.002 -0.00157 -0.00232* 49 OLS FE RE SGMM (-0.89) (-0.93) (-0.89) (-1.77) ΔNPL it-2 -0.214*** (-15.18) Constant N -0.0549 -0.0885 -0.0549 (-0.74) (-0.80) (-0.81) 254 254 254 Hansen 251 20.52 0.198 AR1 -2.35 0.0188 AR2 -1.144 0.253 (*), (**) and (***) are the significant level at 10%, 5% and 1% respectively Values in the parentheses are T-statistics 50 APPENDIX III THE ESTIMATED RESULTS FOR THE REGRESSION MODELS WITH SEPARATE HYPOTHESES USING SYSTEM GENERALIZED METHOD OF THE MOMENTS Table A1: Estimation without lagged variables ΔNPL Model 1a Model 2a Model 3a Model 4a Model 5a Model 6a Model 7a Model 8a ΔNPLit-1 0.194*** 0.238*** 0.117*** 0.183*** 0.0936*** 0.201*** 0.199*** 0.212*** (6.66) (7.60) (5.91) (6.33) (6.29) (6.76) (6.78) (6.78) -0.00543*** -0.00553*** -0.00569*** -0.00509*** -0.00585*** -0.00531*** -0.00543*** -0.00583*** (-8.68) (-9.07) (-20.86) (-8.32) (-19.27) (-8.86) (-8.78) (-9.52) -0.000624 0.00145 -0.00113 -0.00207 -0.00147 0.000918 0.000566 -0.000168 (-0.27) (0.63) (-0.94) (-1.00) (-1.11) (0.40) (0.24) (-0.08) 0.00117*** 0.00139*** 0.00102*** 0.00106*** 0.000976*** 0.00130*** 0.00126*** 0.00161*** (5.40) (5.93) (10.08) (5.44) (10.36) (5.77) (5.63) (6.90) ΔGDP ΔUN ΔLIR IE -0.00181*** (-5.06) SR 0.0175*** (6.39) 51 ΔNPL Model 1a Model 2a Model 3a Size Model 4a Model 5a -0.00573 -0.0299*** (-1.30) (-7.04) LR Model 6a Model 7a Model 8a 0.00152*** (6.27) ROE 0.0105*** (4.86) NI 0.00173** (2.32) ΔGD 0.000536*** (5.49) N Hansen AR1 AR2 267 267 267 267 267 267 267 267 21.96 18.2 23.97 21.23 26.83 15.74 19.6 15.95 0.109 0.252 0.349 0.13 0.218 0.399 0.188 0.385 -2.227 -2.214 -2.305 -2.204 -2.371 -2.175 -2.234 -2.185 0.026 0.0268 0.0211 0.0275 0.0177 0.0297 0.0255 0.0289 1.288 1.305 1.245 1.253 1.252 1.249 1.346 1.239 52 ΔNPL Model 1a Model 2a Model 3a Model 4a Model 5a Model 6a Model 7a Model 8a 0.198 0.192 0.213 0.21 0.211 0.212 0.178 0.215 (*), (**) and (***) are the significant level at 10%, 5% and 1% respectively Values in the parentheses are T-statistics Table A2: Estimation with lagged variables ΔNPL ΔNPLit-1 ΔGDP it-1 ΔGDP it-2 ΔUN it-1 ΔUN it-2 Model 1b Model 2b Model 3b Model 4b Model 5b Model 6b Model 7b Model 8b -0.208*** -0.207*** -0.193*** -0.211*** -0.209*** -0.196*** -0.106*** -0.221*** (-17.41) (-17.20) (-14.54) (-18.41) (-16.13) (-12.80) (-3.87) (-37.02) 0.0140*** 0.0136*** 0.0145*** 0.0140*** 0.0136*** 0.0144*** 0.00286** 0.0121*** (17.36) (16.63) (15.82) (17.48) (16.76) (14.39) (2.35) (22.07) -0.00699*** -0.00664*** -0.00700*** -0.00710*** -0.00693*** -0.00707*** 0.00107 -0.00535*** (-10.91) (-9.66) (-8.31) (-10.66) (-8.31) (-8.26) (0.73) (-8.26) -0.00149 -0.00106 -0.000532 -0.00162 0.000861 -0.000787 -0.00256 -0.000418 (-0.79) (-0.53) (-0.28) (-0.87) (0.48) (-0.39) (-0.64) (-0.29) -0.0118*** -0.0118*** -0.0143*** -0.0121*** -0.0116*** -0.0130*** -0.0134*** -0.00928*** (-5.05) (-4.63) (-4.56) (-5.09) (-3.51) (-4.51) (-5.40) (-4.49) 53 ΔNPL Model 1b Model 2b Model 3b Model 4b Model 5b Model 6b Model 7b Model 8b ΔLIR it-1 0.00340*** 0.00332*** 0.00345*** 0.00342*** 0.00338*** 0.00346*** 0.00252*** 0.00285*** (14.24) (13.21) (12.95) (13.99) (13.16) (12.20) (5.80) (12.66) 0.00303*** 0.00300*** 0.00294*** 0.00302*** 0.00303*** 0.00303*** 0.00279*** (17.74) (19.01) (17.44) (17.73) (19.39) (17.21) (17.24) 0.0000323 -0.0294*** (0.01) (-3.88) ΔLIR it-2 IE it-1 0.000222 (0.43) IE it-2 -0.00119*** (-3.88) SR it-1 0.0109 (1.30) SR it-2 -0.00393 (-0.44) Size LR it-1 -0.0135 (-1.54) 54 ΔNPL Model 1b Model 2b Model 3b Model 4b LR it-2 Model 5b Model 6b Model 7b Model 8b 0.0171* (1.95) ROE it-1 -0.00933** (-2.52) ROE it-2 0.0123*** (6.32) ΔGD it-5 -0.000376 (-1.54) NI it-1 0.00163*** (10.15) NI it-2 -0.00176 (-1.60) N Hansen AR1 251 251 251 251 251 251 166 251 20.11 20.25 18.1 20.08 19.34 19.4 20.4 27.59 0.215 0.209 0.318 0.216 0.252 0.249 0.157 0.278 -2.475 -2.492 -2.414 -2.473 -2.431 -2.474 -2.192 -2.489 55 ΔNPL AR2 Model 1b Model 2b Model 3b Model 4b Model 5b Model 6b Model 7b Model 8b 0.0133 0.0127 0.0158 0.0134 0.0151 0.0133 0.0284 0.0128 -0.807 -0.826 -0.66 -0.84 -0.867 -0.798 -0.599 -0.978 0.42 0.409 0.509 0.401 0.386 0.425 0.549 0.328 (*), (**) and (***) are the significant level at 10%, 5% and 1% respectively Values in the parentheses are T-statistics 56 ... one of the factors to evaluate the health of banking system This factors is defined as the problem loans of banks The non- performing loan ratio of Vietnamese banking system has a significant increase... of cash inflows is the trend of all segments At this time, the debt payment of firms as well as individuals becomes difficult It leads to the increase in non- performing loans in the banking system. .. result indicated that higher of cost inefficiency can lead the rising of non- performing loans In addition, the possibility of skimping hypothesis is investigated in individual banks The moral hypothesis