Macro determinants on non performing loans of commercial banks in vietnam

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY TRAN NGOC LOAN MACRO DETERMINANTS ON NON-PERFORMING LOANS IN VIETNAM UNDERGRADUATE THESIS MAJOR: FINANCE – BANKING CODE: 7340201 HO CHI MINH CITY – 2018 MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY TRAN NGOC LOAN MACRO DETERMINANTS ON NON-PERFORMING LOANS IN VIETNAM UNDERGRADUATE THESIS MAJOR: FINANCE – BANKING CODE: 7340201 SUPERVISOR: MS NGUYEN THI MY HANH HO CHI MINH CITY – 2018 i ABSTRACT The global economic history has witnessed many financial crises have stemmed from inefficient banking industry Hence, the banking sector can be seen as the most vital determinants of development and stability of the economy In recent years, the non-performing loan (NPL) problem of commercial banks in Vietnam has become increasingly serious, raising concerns about uncertainty surrounding the banking sector in particular and the economy in general Many studies have found that NPLs are determined by internal (or bank-specific) factors and external (or macroeconomic) factors The research is carried out to investigate the macroeconomic determinants on NPLs of commercial banks in Vietnam from 2011 to 2016 Based on previous studies, this research is going to collect the potential external factors such as real GDP growth rate, inflation, unemployment and real interest rate Dynamic panel data estimation is employed to serve the purpose of this research Dataset includes 17 commercial banks during the period of years from 2011 to 2016 The outcome reveals that unemployment rate, GDP and real interest rate have significant influences on NPLs while inflation rate and NPL in the previous year are found to be not relevant in the case of Vietnam ii ACKNOWLEDGEMENT First of all, I would like to express my very appreciation to my supervisor Ms Nguyen Thi My Hanh for her sincere comments, for her patient guidance and useful critiques of this work Also, I would like to thank all the members of staff at High quality department of Banking University, Ho Chi Minh City Without their assistance, this thesis would not be completed In addition, I am very grateful to my family and friends for giving the biggest support and strength in difficult moments iii AUTHOR’S DECLARATION I hereby confirm that this thesis entitled: “Macro determinants on nonperforming loans in Vietnam”, is my own work, and none of this work has been published before submission Regards, Tran Ngoc Loan iv THESIS SUPERVISOR’S DECLARATION OF APPROVAL I hereby confirm that I have supervised the undergraduate thesis of Ms Tran Ngoc Loan entitled: “Macro determinants on non-performing loans in Vietnam” The above mentioned thesis is completed and can be submitted for public defense Sincerely, Ms Nguyen Thi My Hanh v TABLES OF CONTENTS ABSTRACT .i ACKNOWLEDGEMENT .ii AUTHOR’S DECLARATION iii THESIS SUPERVISOR’S DECLARATION OF APPROVAL iv TABLES OF CONTENTS v LIST OF ABBREVIATIONS viii LIST OF TABLES ix LIST OF FIGURE x CHAPTER 1: INTRODUCTION 1.1 Banking sector in Vietnam 1.2 Background of the study 1.3 Research objectives 1.4 Research questions 1.5 Research subjects and scope 1.6 Research method 1.7 Significance of the study 1.8 Structure of the study 1.9 Conclusion CHAPTER 2: LITERATURE REVIEW 2.1 Introduction vi 2.2 Theoretical Framework 2.2.1 Business cycle theory 2.2.2 Financial accelerator theory 10 2.2.3 Monetary policy transmission mechanism theory 10 2.2.4 Debt deflation theory 11 2.2.5 Inflation and loan default 12 2.3 Macro determinants of non-performing loans 13 2.3.1 Non-performing loans 13 2.3.2 GDP growth rate 17 2.3.3 Inflation 18 2.3.4 Unemployment Rate 19 2.3.5 Real interest rate 20 2.4 Empirical Review 20 2.5 Conclusion 28 CHAPTER 3: RESEARCH METHOD 29 3.1 Introduction 29 3.2 Research questions and hypotheses 29 3.2.1 Research questions 29 3.2.2 Research hypotheses 29 3.3 Model specification 31 3.4 Research method 32 3.5 Data collection 33 vii 3.6 Conclusion 35 CHAPTER 4: FINDINGS AND DISCUSSION 36 4.1 Introduction 36 4.2 Overview of non-performing loans in Vietnam 36 4.3 Descriptive statistics 40 4.4 Estimation results 41 4.5 Tests of specification for panel data 43 4.6 Discussion 44 4.7 Conclusion 47 CHAPTER 5: CONCLUSION 49 5.1 Introduction 49 5.2 Conclusion 49 5.3 Policy implications 50 5.4 Limitations of the study 51 5.5 Suggestions for future research 51 REFERENCES 53 APPENDIX 1: LIST OF COMMERCIAL BANKS USED IN MODEL 57 APPENDIX 2: RESULTS OF MODEL FROM STATA 13 58 APPENDIX 3: MACRO VARIABLES USED IN MODEL 59 viii LIST OF ABBREVIATIONS Abbreviations Full meaning FEM Fixed Effects Model GDP Gross domestic product GMM Generalized Moments of Method GSO General Statistics Office IMF International Monetary Fund MOF Ministry of Finance NFSC National Financial Supervision Commission NPLs Non-performing loans OLS Ordinary Least Square REM Random Effects Model SBV The State Bank of Vietnam TTP Trans Pacific Strategic Economic Partnership WB World Bank WTO World Trade Agreement 46 Nguyen Thuy Duong and Tran Thu Huong (2017), this finding fits the case of Vietnam‟s economy, which immensely depends on bank loan capital with a credit growth “boiled” by soaring economy In parallelism, misallocation of capital to highrisk funds potentialise the eventual incurrence of credit risk GSO reported Vietnam‟s ICOR4 to persist at the upper position among its regional counterparts, which indicates a poor performance of investment capital use Therefore, the relationship of GDP growth rate can turn into positive in the future In the other hand, inflation rate is insignificant to the banks‟ NPLs and inconsistent with this research hypothesis The inflation is found that there is no statistical effect on the level of NPL, which is contrast to empirical literature However, the finding in this study supports the research of Forback (2005) who have got the same result The research of Warue (2013) concluded that while government banks had a tendency to be responsive to changes in inflation, the local and foreign banks did not response Beside, Vo Thi Ngoc Ha, Le Vinh Trien and Ho Diep (2014) research also has come to a conclusion that inflation rate have not been found statistically significant with NPL for Vietnamese commercial banks The result indicates a strongly positive relationship between unemployment rate and NPL in commercial banks This is similar to the study of Louzis (2010) for case of Greek banks, Nkusu (2011) for 26 advanced countries Moreover, Ahlem Selma Messai and Fathi Jouni (2013) who confirmed a positive and significant correlation between unemployment rate and NPL also stated that in fact, unemployed customers are unable to meet their commitments and repay the loan leading to the increase in NPL In addition, regarding enterprises, rising in unemployment could lead to a decline Incremental Capital Output Ratio is a metric that assesses the marginal amount of investment capital necessary for an entity to generate the next unit of production It can be expressed in the following formula, where K is capital output ratio, Y is output (GDP), and I is net investment ICOR = K /Y 47 in production due to the decline in effective demand Consequently, this can cause a decline in revenue and a fragile state debt However, there are some studies suggest that unemployment rate has no significant effect or negative effect on NPLs This may be due to the state of economy in different time and the various banks‟ business models in different countries In the case of Vietnam, unemployment rate reported by GSO is slightly low compared to other countries in regions because of calculation However, in reality, the unemployment situation is unstable because of low labor quality Hence, when the economy is in the downturn as in 2012, it contributes partly to the increase of NPL in Vietnam The estimation result found a statistically negative linkage between NPLs and real interest rate It contrasts with the research hypothesis This finding is in line with the studies of Fawad and Taquadus (2013) who suggested the same results He explained that with the increase in interest rate, deposit and lending rates of banks increases When interest rate increases, businesses and individuals prefer depositing instead of investing Therefore, less lending reduces NPLs Moreover, as increase in interest rate, existing borrowers have to pay back their full loans to keep their rating goods as well as preventing the increase of loans The result of this study also support the findings of Mwangi (2014), Nguyen Thuy Duong and Tran Thi Thu Huong (2016) In the case of Vietnam, real interest rate is not stable because of changes in monetary policies by the State bank of Vietnam When Vietnam‟s economy was in the difficult situation, especially in 2011 and 2012, the inappropriate change of interest rate contributed to increase in NPLs 4.7 Conclusion The estimation results find out that among the five explanatory variables, there are three variables which have statically significant relationship to NPLs, including GDP growth rate, unemployment rate and real interest rate After conducting test to 48 check the effectiveness of the model, it is shown that the result is appropriated The relationships of macroeconomic determinants and non-performing loan are discussed compared to the results of the previous studies 49 CHAPTER 5: CONCLUSION 5.1 Introduction This chapter sums up the findings of this study from previous chapters Next, recommendations for management non-performing loans are given out based on the findings Finally, the author points out limitations of this study as well as suggestions for future studies 5.2 Conclusion The main objective of this study is to investigate the macroeconomic determinants of non-performing loans of commercial banks in Vietnam by utilizing panel data in 6-year period (from 2011 to 2016) The data set concludes 17 commercial banks‟ NPLs Based on empirical literature, the author selects potential macroeconomic variables to examine the impact of macro determinants on nonperforming loans Dynamic panel data approach is applied to estimate via Stata 13 In this study, the outcome suggests that Real GDP growth rate, unemployment rate and real interest rate have significant impact on non-performing loan In more details, as expected, real GDP and unemployment play vital roles in managing NPLs, especially unemployment rate This finding reflects the reality situation that when people are unemployed, their incomes not meet the ability of repayment loan and that leads to the growth of non-performing loan The finding of real interest rate is surprising It indicates a negative effect of real interest rate on the level of NPLs It shows that the decrease in real interest rate leads to the increase in NPLs and vice versa Although this implication is in contrast to most of prior studies, it reflects the changes of NPLs in reality On the other hand, NPL ratio in year t-1 is expected to have a positive effect on the NPL in year t However, in this study, the result of NPL ratio in year t-1 is 50 statistically insignificant This can be explained that in recent years, thanks to from the government and the State Bank‟s effort, the establish of VAMC has contributed to mitigating non-performing loans in commercial banks In conclusion, NPL is one of factors affecting commercial banks‟ stability and performance as well as the economy‟s development Therefore, in order to minimize risk from NPL, financial institutions and the government should make appropriate managerial policies 5.3 Policy implications Based on the findings of this study, the following recommendations are presented  In order to maintain the stability of economy, it is necessary for a combination of government and businesses In more details, the government and policy makers should be careful to implement macroeconomic policies which ensure the stable growth of economy with controlling inflation and interest rate The government should promote the innovation process to achieve the sustainable growth and competitiveness in the economy Moreover, enterprises are stimulated expanding production to encourage the economic development as well as reduce unemployment rate  In the banking system, it is necessary to stabilize macroeconomic environment, control inflation and support growth SBV should determine appropriate monetary policies which ensure stability in banking sector as well as facilitate credit institutions  VAMC has contributed a great part in reducing NPL in recent years Therefor, in future, VAMC will continue to buy non-performing loans from commercial banks and solve effectively with support from the government Moreover, the 51 authority in banking sector should motivate the M&A activities between small banks which have ineffective performances to create a better financial strength and to be easier to administrate 5.4 Limitations of the study The study has some limitations which have to be pointed out as follows:  One of the advantages GMM is to enable to analyze a large data sample In this study, author employs a data set with 102 observations includes 17 cross-section units in years In comparison to previous studies, this data is quite small The time period of study is years – a short term period so the result can not be effective as expected  The data consists of time series data, but the study did not check the problem of stationary  Based on previous studies, there are some macroeconomic factors affect to NPL such as exchange rate, tax rate Therefore, this study might not be able to reflect the full scale of macroeconomic determinants In addition, NPL is also affected by banking-specific factors so the determinants of NPL will be defined more accurate by adding banking-specific factors 5.5 Suggestions for future research As mentioned in the previous sections, there are several drawbacks in this study In order to make a more precise research, a few suggestions are given for future researchers who have the same interest in this topic  The research period should be lengthened in order to capture more accurate and precise outcome The economic environment and banking system change over time due to new regulations and liberalization The result in this study just 52 reflect a short-term situation In addition, future researchers should check problem of stationary when using time-series data  Further research should select more macroeconomic variables to examine the full scale of macro environment‟s impacts on NPL According to empirical literature review, exchange rate is also a significant factor of NPL 53 REFERENCES Ahlem Salma Messai and Fathi Jouini (2013), ‘Micro and Macro Determinants of Nonperforming loans’, International Journal of Economics and Financial Issues, Vol.3, No.4, pp 852-860 Berger & DeYoung (1997), ‘Problem Loans and Cost Efficiency in Commercial Banks’, 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Commerial Joint Stock Bank MBB Military Commercial Joint Stock Bank NamABank Nam A Commercial Joint Stock Bank Seabank Southeast Asian Commercial Joint Stock Bank SHB Saigon-Hanoi Commercial Joint Stock Bank STB Saigon Thuong Tin Commercial Joint Stock Bank TCB Vietnam Technological and Commercial Joint Stock Bank TPbank VCB TienPhong Commerical Joint Stock Bank Joint Stock Commercial Bank for Foreign Trade of Vietnam VIB Vietnam International Commercial Joint Stock Bank Vietcapital Bank Viet Capital Commercial Joint Stock Bank 58 APPENDIX 2: RESULTS OF MODEL FROM STATA 13 Estimation result by Stata 13 Arrelano-Bond test and Hansen test 59 APPENDIX 3: MACRO VARIABLES USED IN MODEL GDP growth rate Inflation rate 60 Unemployment rate Real interest rate ... determinants of non- performing loans 2.3.1 Non- performing loans 2.3.1.1 Definition There is no single global standard definition of NPLs in the world It differs in different countries According... level of NPLs Because of the increasing NPLs in Vietnam, the author chooses the thesis topic ? ?Macro determinants on non- performing loans in Vietnam? ?? The study will examine the effects of macroeconomic...MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY TRAN NGOC LOAN MACRO DETERMINANTS ON NON- PERFORMING LOANS IN VIETNAM UNDERGRADUATE