Determinants Of Credit Risk In Vietnamese Comercial Banks, 2023.Pdf

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING NGUYEN THI NHU YEN DETERMINANTS OF CREDIT RISK IN VIETNAMESE COMMERCIAL BANKS GRADUATE THESIS MAJOR FINANCE –[.]

HO CHI MINH UNIVERSITY OF BANKING

NGUYEN THI NHU YEN

DETERMINANTS OF CREDIT RISK IN VIETNAMESE

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

HO CHI MINH UNIVERSITY OF BANKING

Author: NGUYEN THI NHU YEN

This research aims to find the determinants affecting the credit risk of commercial banks in Vietnam The credit risk of Vietnamese commercial banks is measured by a bunch of independent variables such as bank–specific variables including the non-performing loans (NPL), the size of the bank (Size), equity-to-asset ratio (CAP), return on assets (ROA), return on equity (ROE), loans and bank profitability (PROF) The author also uses some research methods, namely Pooled OLS model, FEM model, REM model, and S-GMM method, which are based on

the unbalanced panel data of 27 commercial banks in Vietnam from 2010 to 2022

The study also used the independent variables which are represented for the macroeconomic elements, namely economic growth rate (GDP), inflation rate (INF), and the unemployment rate (UNEMP) The research results show that almost all microeconomic elements significantly affected the credit risk of Vietnamese commercial banks Moreover, all the macroeconomic determinants used in the thesis had positive effects on the credit risk of commercial banks operating in the

Vietnamese stock market

Keywords: Credit risk, commercial banks, Vietnam, macroeconomic

elements, microeconomic elements, bank-specific factors, panel data

DECLARATION OF AUTHENTICITY

As the author of this thesis, I declare that the following are:

Full name: Nguyen Thi Nhu Yen

Student class: HQ7 – GE06, Faculty of Finance and Banking, Ho Chi Minh

University of Banking

Student code: 030135190760

I declare that the study with the title "Determinants of credit risk in

Vietnamese commercial banks" is completely made by myself based on inquiry and

the guidance of my lecturer Dr Le Ha Diem Chi In addition, none of this research

has been published before submission All the research data in the tables used for

the analysis, evaluation, and comment are collected from many different sources

indicated in the references section If any fraud is discovered, I take full

responsibility for the content of my thesis

ACKNOWLEDGEMENTS

I would like to express my gratitude to all lecturers at Ho Chi Minh University of Banking for teaching and imparting valuable knowledge and experiences to me during my studying process It was the fundamental foundation and valuable luggage for me to enter the practice working environment in the near future In addition, I also would like to thank my lecturer, Dr Le Ha Diem Chi has devoted herself to teaching and giving comments to help me to complete my graduation thesis well Finally, I wish all lecturers at Ho Chi Minh University of Banking always have a lot of good health and success in their occupations

CONTENTS

ABSTRACT i

DECLARATION OF AUTHENTICITY ii

ACKNOWLEDGEMENTS iii

CONTENTS iv

LIST OF ABBREVIATIONS viii

LIST OF TABLES x

LIST OF GRAPHICS xi

CHAPTER 1: INTRODUCTION 1

1.1 Reasons for choosing the study 1

1.2 Research objectives 3

1.2.1 General objectives 3

1.2.2 Specific objectives 3

1.3 Research questions 4

1.4 The research subject and scope of study 4

1.4.1 The research subject 4

1.4.2 Scope of the research 4

1.5 Research method 6

1.5.1 Research method 6

1.5.2 Research data 6

1.6 Contribution 7

1.7 Research structure 7

CONCLUSION OF CHAPTER 1 9

CHAPTER 2: THEORETICAL FRAMEWORK AND REVIEW OF PREVIOUS EXPERIMENTAL STUDIES 10

2.1 Review of commercial banks 10

2.1.1 Commercial banks 10

2.1.2 Functions of commercial bank 10

2.2 Review of bank credit 12

2.2.1 Bank credit 12

2.2.2 Features of bank credit 13

2.2.3 The role of commercial bank credit 14

2.3 Review of credit risk 15

2.3.1 Credit risk 15

2.3.2 The impact of credit risk on commercial banks 16

2.3.3 Factors affecting credit risk of commercial banks 17

2.4 Review of the prior experience research 21

2.4.1 Review of domestic research paper 21

2.4.2 Review of foreign research paper 23

CONCLUSION OF CHAPTER 2 32

CHAPTER 3: RESEARCH METHODS 33

3.1 Research process 33

3.2 Sample and research data 34

3.2.1 The research sample 34

3.2.2 The research data 34

3.3 Research method 35

3.3.1 Variance inflating factor - VIF 35

3.3.2 Analysis and selection of effective models 35

3.3.3 Feasible Generalized Least Square - FGLS 36

3.3.4 Testing and handling defects of the research model 37

3.4 Research model 38

3.4.1 Research model 38

3.4.2 Explaining the variables in the research model 39

3.4.3 Research hypotheses 41

CONCLUSION OF CHAPTER 3 48

CHAPTER 4: RESEARCH RESULTS 49

4.1 Descriptive statistical analysis 49

4.2 Check for multicollinearity 51

4.3 Correlation analysis 52

4.4 Table Regression Data Analysis (OLS/FEM/REM Model) 54

4.5 Selection of estimation method 55

4.6 Test for heteroscedasticity and autocorrelation 56

4.6.1 Test for heteroscedasticity 56

4.6.2 Test for autocorrelation 57

4.7 Overcoming the research model by FGLS 58

4.8 Test for endogenous variable and GMM regression model method 59

4.8.1 Test for endogenous variable 59

4.8.2 GMM Regression Model Method 60

4.9 Summarize and discuss research results 62

4.9.1 Microeconomic variables 62

4.9.2 Macroeconomic variables 66

CONCLUSION OF CHAPTER 4 70

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 71

5.1 Conclusions about the study 71

5.2 Some suggested solutions 72

5.3 Limitations of the graduate thesis and direction for future research 74

5.3.1 Limitations of the research 74

5.3.2 Direction for future research 75

CONCLUSION OF CHAPTER 5 76

REFERENCES i

APPENDIX iv

LIST OF ABBREVIATIONS

3 EVFTA European-Vietnam Free Trade Agreement

5 FGLS Feasible Generalized Least Squares

16 S-GMM System generalized method of moments

17 SIZE Size of the bank

LIST OF TABLES

Table 2.1 Summary table of prior research studies 26

Table 3.1 Statistics of expected signs of variables in the research model 45

Table 4.1 Statistics of variables used in the research model 49

Table 4.2 Results of multicollinearity test 51

Table 4.3 Correlation coefficients between research variables 53

Table 4.4 Results of Pooled-OLS, FEM and REM 54

Table 4.5 Selection of method 55

Table 4.6 Modified Wald test 57

Table 4.7 Wooldridge test results 57

Table 4.8 FGLS model troubleshooting results 58

Table 4.9 Endogenous and exogenous variables in the research model 60

Table 4.10 GMM endogenous test results 61

LIST OF GRAPHICS

Graph 3.1 The research process 34

Graph 4.1 Relationship between SIZE and CR 63

Graph 4.2 Relationship between ROA and CR 64

Graph 4.3 Relationship between NPL and CR 64

Graph 4.4 Relationship between ROE and CR 65

Graph 4.5 Relationship between Loans and CR 66

Graph 4.6 Relationship between GDP and CR 67

Graph 4.7 Relationship between UNEMP and CR 67

Graph 4.8 Relationship between INF and CR 69

CHAPTER 1: INTRODUCTION

1.1 Reasons for choosing the study

Commercial banks play the role of a payment intermediary and a channel to meet capital sources for economic entities in society In addition, commercial banks are also tools for the State to regulate the macroeconomic economy Through commercial banks, the government can implement fiscal and monetary policies to support domestic businesses and develop the economy Since then, it can be seen that the bank's activities have positive or negative effects on entities in the economy Credit risk is one of the factors reflecting the operational status of commercial banks Today, commercial banks focus on and decrease credit risk, especially in the context of today's market economy and digital transformation Because if credit risk increase, it means that the bank's performance is weak, which not only causes losses for commercial banks but also affects other economic entities Therefore, assessing the impact of elements on credit risk is essential to determine the effect of microeconomic and macroeconomic elements on credit risk Since then, this may help managers of commercial banks to make some appropriate solutions to minimize credit risk in business activities

It can be seen that the global economic crisis of 2007-2008 has caused the world economy to face many difficulties over many years Specifically, the unemployment rate increased, trade activities declined, capital flows fluctuated continuously in all markets, etc Although the world economic growth rate reached 5.1% in 2010, in 2011 this ratio fell to 3.9% and this figure was only 3.2% in 2012 and 2013 However, a year later, the growth rate showed signs of recovery, and capital flows in the market began to be more stable Financial institutions, mainly banks, began to record positive growth signals The growth rate represented the efforts of economic recovery in many countries around the world, including Vietnam The credit growth rate in the commercial banking system in Vietnam has improved compared to the previous period

However, in 2020-2021, the world economy would continue to change

because of the detrimental impacts of the Covid-19 pandemic The credit risk of commercial banks in Vietnam was significantly increased because many businesses had reduced revenue or were unable to pay their debts at maturity This increased the risk of debt recovery, slow capital turnover, etc Although 2020 was still a prosperous year for the Vietnamese economy, the gross domestic product (GDP) in

2020 was estimated to increase by 2.91% This is due to the ability to control the impact of the Covid-19 epidemic well and the implementation of the European-Vietnam Free Trade Agreement (EVFTA), the industrial production industry had a high growth rate compared to 2019 but transportation activities, especially transportation with foreign countries, faced many difficulties due to orders to close major markets in the world According to the report "Banking industry profit picture

in 2020 and Forecast for 2021" by BIDV Training and Research Institute, interest income in 2020 still played an important role in the profit of the banking industry but with declining contribution momentum In 2021, the spread of the fourth Covid-

19 pandemic along with many strict epidemic prevention and control measures has made 119.8 thousand businesses withdraw from the market, in which the number of enterprises temporarily suspending business is nearly 55 thousand enterprises; 48,1 thousand enterprises stopped operating to wait for dissolution procedures; 16,7 thousand enterprises completed dissolution procedures including 211 enterprises with the capital scale of over 100 billion (According to the General Statistics Office 2021) Consequently, the non-performing loan ratio of the banking industry increased sharply, the internal non-performing loans ratio and the potential non-performing loans ratio including debts that have been restructured according to Circulars 01, 03, 14 – State Bank of Vietnam (SBV) is expected at 7.1-7.7% in

2021 Although the State Bank has supportive policies and commercial banks have also prepared in advance, the bank’s business activities will not avoid the problem

of a record-high non-performing loan ratio

In 2022, because the conflict between Russia and Ukraine is prolonged and complicated, this will push up world commodity prices, which causes global

inflation to increase rapidly and reach the highest level in more than 40 years To control inflation, the central banks of many different countries in the world have stepped up tightening of monetary policy, raising operating interest rates at a high level and strong frequency The difficult world economy has put great pressure on the government’s macroeconomic management However, with the direction of the government, the Vietnamese economy basically recovered positively, stabilized the macroeconomic economy, and inflation was controlled Contributing to this success

is an important part of bank credit capital

Stemming from that importance, the author chooses the study with the title

"Determinants of credit risk in Vietnamese commercial banks" Besides, the review and assessment of elements affecting credit risk in Vietnamese commercial banks support managers and strategic planners in making investment decisions or

development directions of commercial banks

Secondly, the study measures the level and direction of the impact of these variables on the credit risk of commercial banks in Vietnam

Finally, the author proposes some appropriate solutions to decrease credit risk for commercial banks in particular and the Vietnamese economy in general

1.3 Research questions

After identifying the research issue and research objectives, the research questions are posed to shape the scientific idea Specifically, the study will mainly focus on the following research questions:

- What elements affect the credit risk of Vietnamese commercial banks from 2010 to 2022?

- How are the factors affecting the credit risk of Vietnamese commercial banks?

- What is the optimal solution to decrease the credit risk of Vietnamese commercial banks through these elements?

1.4 The research subject and scope of study

1.4.1 The research subject

Determinants of credit risk in Vietnamese commercial banks

1.4.2 Scope of the research

- Scope of time: The data of the research are collected from the annual

financial statements of commercial banks over the period of 13 years, from 2010 to

2022, which have been audited, and these reports are publicized on their officical websites by Vietnamese commercial banks The reason why the author chooses to survey this period is that the Vietnamese commercial banking system has experienced many important events that strongly influenced the credit of commercial banks from 2010 to 2013 After that, between 2020 and 2022, commercial banks’ activities are affected by the Covid-19 pandemic Therefore, it can be said that the credit risk of commercial banks during the period may have

many fluctuations

- Scope of space: The author uses research data from 27 commercial banks

in Vietnam The reason why the author chooses 27 commercial banks is because these commercial banks are listed on the Vietnamese stock market including the Ho Chi Minh Stock Exchange (HOSE), the Hanoi Stock Exchange (HNX), and the UPCOM stock exchange Therefore, the research data are censored before publication and have full financial data over the years so that the author can analyze

- Joint Stock Commercial Bank for Foreign Trade of Vietnam (VCB)

- Vietnam Joint Stock Commercial Bank of Industry and Trade (CTG)

- Joint Stock Commercial Bank for Investment and Development of Vietnam (BID)

- Vietnam Technological and Commercial Joint Stock Bank (TCB)

- Military Commercial Joint Stock Bank (MBB)

- Saigon Thuong Tin Commercial Joint Stock Bank (STB)

- Vietnam Commercial Joint Stock Bank for Private Enterprise (VPB)

- Ho Chi Minh city Development Joint Stock Commercial Bank (HDB)

- Asia Commercial Joint Stock Bank (ACB)

- The Maritime Commercial Joint Stock Bank (MSB)

- Vietnam Export Import Commercial Joint Stock (EIB)

- LienViet Commercial Joint Stock Bank (LPB)

- TienPhong Commercial Joint Stock Bank (TPB)

- Vietnam International Commercial Joint Stock Bank (VIB)

- Southeast Asia Commercial Joint Stock Bank (SSB)

- Orient Commercial Joint Stock Bank (OCB)

- Saigon Commercial Joint Stock Bank (SCB)

- National Citizen Commercial Bank (NCB)

- An Binh Commercial Joint Stock Bank (ABB)

- Kien Long Commercial Joint Stock Bank (KLB)

- BAC A Commercial Joint Stock Bank (BAB)

- Nam A Commercial Joint Stock Bank (NAB)

- Viet Capital Commercial Joint Stock Bank (BVB)

- Saigon Bank For Industry And Trade (SGB)

- Petrolimex Group Commercial Joint Stock Bank (PGB)

- Bao Viet Joint Stock Commercial Bank (BaoVietBank)

- Vietnam – Asia Commercial Joint Stock Bank (VAB)

1.5.1 Research method

The thesis uses quantitative method, typically multivariate linear regression analysis to analyze the elements affecting the credit risk of commercial banks in Vietnam from 2010 to 2022 by software STATA17 In addition, the author has used Pooled OLS model, fixed effects model (FEM), and random effects model (REM)

to consider and analyze the determinants of credit risk in Vietnamese commercial banks Then, the author conducts the F-test to select the OLS model or the FEM model; Hausman test to select the FEM model and REM model; Breusch & Pagan test to choose the OLS model and REM model

After selecting an appropriate model, the author conducts a test for autocorrelation and variable variance If the research model has defects, the author will use Feasible Generalized Least Squares method (FGLS) to overcome the phenomenon of autocorrelation and variable variance In addition, the study also uses the System generalized method of moments (S-GMM) to solve the problems of endogeneity, variable variance, and autocorrelation so that the methodology becomes more complete

statements of 27 Vietnamese joint stock commercial banks published year by year

Firstly, the study is expected to provide a picture of the elements affecting the credit risk of commercial banks to help bank managers to have appropriate policies to decrease the credit risk of Vietnamese commercial banks

Secondly, because the research subjects of the study are 27 Vietnamese commercial banks, and the scope of the research is over the period of 13 years, from

2010 to 2022, the study contributes to updating the latest results and assessments for commercial banks as well as research results close to the current socio-economic conditions In addition, the study is also done as a reference for future studies

Chapter 2: Theoretical foundations and overview of prior experimental

studies

This chapter presents several concepts related to the research problem Specifically, chapter 2 will present the concept and the theoretical foundations of credit risk, and the criteria to measure the credit risk of Vietnamese commercial banks On the other hand, this chapter also introduces some previous domestic and foreign studies This chapter is considered the basis for the implementation of the research method in the next chapter

Chapter 3: Research methods

This chapter will present some main contents such as the research model, hypothesis and methods to be used to measure microeconomics and macroeconomics variables The research process will be presented in detail steps, accompanied by research methods, calculation methods, and data processing

Chapter 4: Research results

The research results will be presented in such a chapter: Multicollinearity test, correlation coefficient matrix between the variables, table regression data analysis (OLS/FEM/REM), and selection of estimation method The author also uses the generalized least squares regression method (FGLS) to overcome variable variance and autocorrelation; the system generalized least squares regression method (S-GMM) to overcome endogenous variables Based on the empirical results, the elements affecting the credit risk of commercial banks in Vietnam are identified

Chapter 5: Conclusions and recommendations

Based on the research results, the author will make some recommendations and suggestions based on personal opinion to decrease the credit risk of commercial banks in Vietnam in the future

CONCLUSION OF CHAPTER 1

In chapter 1, the author presented the reason for choosing the topic

"Determinants of credit risk in Vietnamese commercial banks" and also presented the research objectives; research questions; the research subject and scope of the study; research methodology, and contribution of the study Besides, the author also divided the research according to the structure of 5 chapters

CHAPTER 2: THEORETICAL FRAMEWORK AND REVIEW

OF PREVIOUS EXPERIMENTAL STUDIES

2.1 Review of commercial banks

2.1.1 Commercial banks

Ha (2013) and Tien (2015) argued that "A commercial bank is an intermediary financial institution with an important position in the economy in general and the financial market in particular The activities of commercial banks are diversified Commercial banks attract capital by mobilizing demand deposits, term deposits, savings deposits, and other forms of mobilization such as issuing bank promissory notes, bank bonds, etc Then they use this capital to make production and business loans, consumer loans, etc In addition, commercial banks also provide payment services and other services such as money transfers, guarantees, etc"

Clause 3, Article 4 of the Law on Credit Institutions (2010) showed that "A

bank is a type of credit institution that can carry out all banking activities following this law According to the nature and objectives of the operation, the types of banks include commercial banks, policy banks, and cooperative banks A commercial bank is a type of bank that is allowed to conduct all banking activities and other business activities following this law to make a profit"

In conclusion, commercial banks are the financial institutions that provides a variety of financial services with the basic business of receiving deposits, making loans, and providing payment services In addition, commercial banks also provide many other services to satisfy the maximum demand for products and services of the society

2.1.2 Functions of commercial bank

2.1.2.1 Deposit management function

The deposit management function is that commercial banks receive deposits,

hold money, preserve money, make withdrawal requests, and spend money for their customers The deposit management function contributes to creating advantages for different entities

Firstly, for customers, the deposit management function helps customers not only ensure the safety of their assets but also helps them to make a profit from the temporary excess capital

Secondly, for commercial banks, the deposit management function helps the banks have capital to perform the credit function, and it is the foundation for commercial banks to perform the payment intermediary function

Finally, for the economy, the deposit management function encourages accumulation in society and concentrates the temporary excess capital to serve economic development

2.1.2.2 The payment intermediary function

With this function, commercial banks will represent customers to deduct money from the account paid to the beneficiary for purchasing goods, services, and other expenses or receive money into the account from the sale of goods, services, and other payments This is also one of the important functions of commercial banks

Firstly, for customers, the payment intermediary function helps them to pay quickly, safely, and efficiently because direct payments among different economic entities are riskier and more expensive, namely transaction expenses, especially because of geographical location

Secondly, for commercial banks, this function creates a condition to attract deposit capital by providing a high-quality non-cash payment service, and it is the foundation that commercial banks create representative money to contribute to increasing the credit scale for the economy

Finally, for the economy, this function helps to promote the circulation of

goods, economic growth, and improve the efficiency of the social reproduction process quickly and effectively Besides, it also helps to reduce cash volume leading

to savings in cash circulation costs

2.1.2.3 Credit intermediary function

A commercial bank is a financial intermediary to connect people who have excess capital and those who lack capital Commercial banks mobilize and concentrate temporary capital sources in the economy to create and use such capital

to make loans The credit intermediation function benefits the following entities:

Firstly, customers who are depositors will benefit from their temporary capital in the form of interest and ensure the safety of their deposits Meanwhile, for customers who are borrowers, this function helps them satisfy the temporary shortage of capital in the process of production, business, and consumption

Secondly, for commercial banks, this function is the foundation for the existence and development of banks through profits from the arbitrage activities between lending and deposit interest rates

Thirdly, for the economy, this function helps to regulate monetary capital from places of temporary excess to places of temporary shortage to contribute to production and business development and promoting economic growth

2.2 Review of bank credit

2.2.1 Bank credit

Nowadays, in many different parts of the world, there are some definitions of commercial bank credit

From the perspective of a commercial bank, Anh (2011) argued that "Credit

is a transaction between two entites, in which the credit grantor (bank/ credit institutions) transfers assets to the credit recipient (firms, individuals) on the principle of repayment of both principal and interest"

The Law on Credit Institutions (2010) showed that "Credit is an agreement

for organizations or individuals to use the money on the principle of repayment by loans or discounting, leasing, bank guarantee, and other credit-granting operations"

2.2.2 Features of bank credit

2.2.2.1 Transactional assets in bank credit are diversified

It can be seen that common transactional assets are currencies or commodities With banks, however, bank credit can be monetary, real property, or signatures Because the banking system not only has a credit intermediary function but also has a payment intermediary function for the economy, the monetary value that bank credit performs is mainly in the form of representative money

In addition, granting credit with real assets is one of the most popular types

of credit in the economy Retail businesses can grant credit with real assets to consumers through installment sales For credit institutions, granted credit with real assets means that credit institutions lease assets to customers through financial leasing transactions Nowadays, according to the Law on Credit Institutions of Vietnam, financial leasing is a separate product of financial leasing companies - a type of non-banking credit institution Therefore, banks indirectly offer this type of product

Moreover, these days, along with the growth of credit activities, the type of signature credit appeared This type of credit is the conditional payment commitment that banks provide for their customers Signature credit of banks have many different forms such as bank guarantee, letter of credit (LC), bill of exchange, etc

2.2.2.2 Risks in bank credit are inevitable and cannot be completely eliminated

Not only bank credit but also all credit transactions are done on the basis of trust Credit risk will occur when the ability to repay or the goodwill to repay the

debt is not fully formed, in which the goodwill to repay is an intangible and unmeasurable factor Therefore, credit risk is an element that comes from the nature

of the credit relationship, banks cannot completely eliminate credit risk On the other hand, in the process of using credit for customers, there are many objective factors beyond the control of the bank and the customer This can change the ability

to repay customers That is why the level of potential risk in the credit relationship

is quite high, banks can only minimize, limit credit risk Therefore, to limit credit risk, commercial banks make many measures to ensure the safety of credit such as building credit policies to guide credit risk management; establishing a multi-stage credit granting process in order to strictly control the credit granting process, and so

on

2.2.2.3 Refund in bank credit is unconditional

Documents formed in a bank-credit relationship such as credit contracts, debt receipts, etc., show the content of an unconditional commitment to repay banks when the debts are due This is the legal binding that customers must follow during the process of using the bank credit However, in some cases, based on the actual conditions of customers, banks may extend the debt, reduce the interest rate, etc

2.2.3 The role of commercial bank credit

Firstly, credit contributes to promoting the reproduction process of society

Credit is an effective tool to transfer capital from people who have excess capital to those who need capital As a result, temporarily unprofitable monetary funds become useful and continue to be profitable People who need capital can also supplement capital to meet the needs of market expansion and business development

Secondly, credit is a channel to convey the influence of the government on macroeconomic objectives

The macroeconomic goals of the economy include stabilizing prices, promoting economic growth, and creating jobs to reduce the unemployment rate in

the economy The above targets are greatly influenced by the volume and structure

of credit provided in the market Through the mechanism that affects interest rates, loan conditions, etc., the State can have appropriate policies to expand or narrow credit, and adjust credit structure according to each specific industry or region

Thirdly, credit creates a condition to expand foreign economic relationships

Because of the development of economic integration, the role of credit has become important in the expansion and development of international economic and financial relations By granting credits for import and export activities, attracting foreign credit sources, and so on, credit contributes to the process of industrialization and modernization

Finally, credit is a tool to implement the state's social policies

To implement social policies, the government can finance with refundable capital from the national budget However, this method is not always effective Moreover, the national budget's capital is limited compared to the needs

non-of entities in society Therefore, in order to overcome the limitation, nowadays, the state can provide funding through credit channels such as preferential credit policies for remote areas or poor students

2.3.1 Credit risk

Chen and Pan (2012) argued that "Credit risk is the rate of change in value between debt instruments and derivatives resulting from problems arising from the basic credit quality of borrowers and lenders" Furthermore, Yurdakul (2014) supposed that "Credit risk is the possibility of a bank's loss when borrowers are unable to repay on time or fail to fulfill their contractual obligations with the banks"

In Vietnam, Clause 24, Article 2 of Circular 41/2016/Circular - State Bank

explained that "Credit risk is the risk that customers fail to perform or are unable to

fulfill part or full of their debt repayment obligations for a contract or agreement with a bank or foreign bank branch"

In conclusion, credit risk may cause financial loss to the bank due to the customer's failure to perform or inability to fulfill the debt repayment and interest obligations as agreed In other words, credit risk occurs when the expected income from the bank's profitable assets may not be repaid on the loan and interest within the term This seriously affects the profit and capital of banks

2.3.2 The impact of credit risk on commercial banks

Credit risk is one of the important issues for the operational efficiency of Vietnamese commercial banks On the other hand, operational efficiency contributes to the development of the country's economy Therefore, the increase in credit risk at commercial banks leads to serious effects on the development of the national economy, especially in the process of economic integration

- The effect of credit risk on the liquidity of commercial banks

When arising non-performing loans, loans cannot be recovered, prolonging the bank's capital recovery process while the bank still meets its debt payment obligations at maturity and customers' deposits lead to the bank facing the risk of insolvency Imbierowicz and Rauch (2014) showed that the relationship between credit risk and liquidity risk based on the research data of commercial banks in the

US from 1998 to 2010 The research results demonstrated the existence of a positive relationship between credit risk and liquidity risk of banks in stable economic periods and crisis periods

- Credit risk can lead to bankruptcy of commercial banks

The non-performing loans seriously affect the assets of commercial banks, if the non-performing loans are high, it leads to bad effects, such as reducing the bank's reputation and customer trust, and it also can lead to the reduction of the bank's ability to raise capital No one wants to deposit money in a bank with poor credit quality, causing a lot of loss A bank that is constantly insolvent will lead to a

crisis from the mass withdrawals of customers and finally bankruptcy (Worrell, Maechler & Mitra, 2007)

- Credit risk will affect the operational performance of commercial banks

The provisioning for credit risks can increase costs such as the management

of the non-performing loan when there are overdue, and this causes the bank's profit

to decrease Petria et al (2015) investigated the elements affecting bank profitability

of 27 EU countries from 2004 to 2011 The author used the return on equity variable (ROE) and return on total assets variable (ROA) as dependent variables to show the business performance of 10 banks, and the non-performing loans ratio represented for credit risk The research results showed that credit risk has a negative relationship with bank performance

- Credit risk affects the economy

Credit risk not only affects the operation of commercial banks but also influences the economy It will directly affect the economy because the banking system is an intermediary institution that provides capital to firms and individuals in the economy Banking activities are highly systematic, when one bank fails, other banks also fail This causes instability for the entire banking system and degrades the national financial system, and causes a crisis for the entire economy Therefore, when credit risk occurs, it not only directly affects economic performance but also affects society (Andrianil and Wiryono, 2015)

In conclusion, bank managers need to take active measures to contribute to the management of banking activities and have appropriate solutions to minimize credit risks

2.3.3 Factors affecting credit risk of commercial banks

The author finds that the credit risk of commercial banks is influenced by many different factors including the group of microeconomic factors and the group

of macroeconomic factors

2.3.3.1 Microeconomic variables

- The size of a bank (SIZE)

Bank size is a measure of the size of a bank's total assets by taking the natural logarithm of total assets (Rabab’ah, 2015) Chernykh and Theodossiou (2011) argued that large banks are more diversified, and commercial banks will have large funds and greater access to borrowers from large firms with high credit card balances Besides, banks also possess adequate resources to develop advanced systems for credit risk assessment and management This makes it possible for the largest banks to offer a larger line of credit

- The equity-to-asset ratio (CAP)

The equity-to-asset ratio will be measured by dividing the capital in a year by the total assets of banks in the same year (Rabab’ah, 2015) This ratio shows the financial capacity of commercial banks and the ability to cope with losses as well as maintain business activities in both favorable and difficult periods The result of the empirical research of Rabab’ah (2015) suggests that if commercial banks maintain a stable CAP ratio, banks can effectively manage their assets As a result, commercial banks can reduce losses due to credit granting Besides, after the global economic crisis in 2007-2008, central banks around the world have required commercial banks to increase their equity to ensure the CAR index When commercial banks have high CAR, they will easily deal with credit risk

- Return on assets (ROA)

Return on assets (ROA) will be calculated by dividing net income after taxes

on the average total assets of banks (Nabila & Younes, 2011) Some financial indicators which show bank profitability are used in previous studies, namely ROA, the author uses ROA as an indicator of bank profitability This shows the bank's ability to generate profits on total capital Besides, based on this variable, it can compare the performance of banks with the same level of risk since this has eliminated the difference about tax policy and financial leverage that commercial

banks are currently using (Kupiec & Lee, 2012 and Messai and Jouini, 2013)

- Return on equity (ROE)

Return on equity (ROE) is calculated by dividing net income after taxes on total equity (Anh & Phuong, 2021) This variable reflects the efficiency of the bank's management in using shareholders' capital Hien and Giang (2020) argue that commercial banks tend to take more risk when they are faced with increased profitability Besides, with a research sample of commircial banks in China, Tan (2016) showed that profitability was not correlated with bank risk Profitability is measured by Return on Assets (ROA) and Return on Equity (ROE) Return on assets (ROA) is the rate of return, which measures the ability to generate profits relative to assets whereas return on equity (ROE) is considered a variable to control between equity management and bank risk ROE is a measure of the return a bank can earn on shareholder's investment In the development strategy or commercial banks, increasing equity is also associated with profitability and credit risk

- Non-performing loans (NPL)

Non-performing loans will be measured by dividing non-performing loans by total loans Whalen (1988) argued that the higher the NPL ratio was, the higher the LLP to the gross loans ratio and the risk would be Higher LLP means greater credit risk of commercial banks, an increased in NPL, a decreased in asset quality and adversely affect profitability

- Loans

Loans will be measured by dividing loans by the total assets of commercial banks Loans representing operational control have a positive effect on credit risk, which means that the more banks give credit, the more they do not guarantee credit limits, so that is why credit risk will increase When commercial banks lend more, they do not control the quality of loans, which can increase credit risk Therefore, guaranteeing credi limit requires strict governance, strict compliance with the credit granting process and ensuring the safety of commercial banks (Casu, 2006), thereby

reducing credit risk in banking activities However Koutoupis and Malisiovas (2019) showed that commercial banks with a high ratio of loans to total assets do not guarantee credit limits, tend to reduce credit risk

- Bank profitability (PROF)

Bank profitability is calculated by dividing earnings after taxes on total assets Profitability is a sufficient measure to appreciate operational and level of risk status of commercial banks There are some kinds of research about the relationship between profitability and credit risk Martynova, Ratnovski and Vlahu (2015) showed that higher profitability allows commercial banks to borrow more and take higher risks on a large scale In addition, Noman (2015) used OLS model, GLS and GMM method for Bangladesh, and the authors conclued that an increase in credit risk leads to a decrease in bank profitability

2.3.3.2 Macroeconomic variables

- Economic growth rate (GDP)

The economic growth rate is measured by the rate of the annual change in the GDP Louzis (2011) showed that when having the economic crisis, the financial situation of almost all companies, business households in the economy was difficult,

so the non-perfoming loans increased On the other hand, when the economy has grown strongly, this ratio decreased because the income of companies and households improved Salas and Saurina (2002) argued a negative relationship of GDP growth on NPLs and infer the rapid spread of macroeconomic elements on the lending capacity of economic entities

- The inflation rate (INF)

Inflation is one of the macroeconomic variables which is used to consider the level impact on credit risk High inflation rates can lead to lower returns and inclined the repayment ability of borrowers, commercial banks choose to take more risk In nations with a change in interest rates, the inflation rate may have a negative

relationship with the ability to pay interest of customers due to changes in monetary policy to combat inflation and maintain profits Haryono, Ariffin & Hamat (2016); Ngo, Le & Le (2021) found a positive relationship between inflation rate and credit risk Besides, Kobia (2018) also found a significant relationship between inflation and credit risk by using research data of commercial banks in Kenya In contrast, Poudel (2013) argued that inflation rate negatively affects credit risk in Nepal over

10 years

- The unemployment rate (UNEMP)

The unemployment rate is a factor that directly affects the personal credit channel of commercial banks It can be easily seen that when the unemployment rate inclines, the number of unemployed people will definitely increase, which influences personal income of people This affects the repayment capacity of banks, leading to a high probability of credit risk and high risk of non-perfoming loan Louzis (2011) analyzing elements affecting NPLs of the Greek banking system in 9 largest Greek banks in the first quarter of 2003 to the third quarter of 2009 By using the GMM method, the author argued that the unemployment rate had a positive impact on the non-performing loans

2.4 Review of the prior experience research

2.4.1 Review of domestic research paper

Ngo, Le & Le (2021) identified the elements affecting credit risk in the

lending activities of joint stock commercial banks operating in the Vietnamese stock market The research data was 23 Vietnamese joint stock commercial banks, and it was collected from financial statements of commercial banks while macroeconomic data was collected from the General Statistics Office of Vietnam from 2009 to

2019 From the empirical results, the authors argued that lagged credit risk, profitability and inflation had positive relationship with credit risk whereas bank capital, bank size, economic growth and loans to deposits ratio had negative effects

on credit risk

Quy & Toan (2014) determined the factors affecting credit risk of

commercial banks The research data included 26 commercial banks over the period

of 4 years, from 2009 to 2012 The authors selected panel data and GMM method to overcome the autocorrelation and endogenneity in regression analysis From the research results, the authors argued that lag variables such credit risk variable ( ), loan growth ( ), and GDP growth rate ( ) with the lag length of one year impact significantly the credit risk level of Vietnamese commercial bank system

Vinh & Sang (2020) determined the impact of macroeconomic elements and

bank-specific elements on the non-performing loans of the commercial banking system in Southeast Asian countries Research data was collected from 204 commercial banks in Southeast Asian countries between 2010 and 2015 From the empirical results, the non-performing loans had a negative relationship with profitability, credit growth, loan to deposit ratio, equity, and bank size but it had a positive impact on the lag of non-performing loans Besides, the macroeconomic determinants had a significant influence on loan quality of the commercial banks Finally, the results also showed that fiscal and income tax variables have a statistically significant effect on non-performing loans

Duyen & Quang (2021) confirmed the non-linear effects of bank-size and

loan-growth on credit risk in Vietnamese commercial banks The research data was collected from audited financial statements of 24 Vietnamese commercial banks over the period of 11 years, from 2009 to 2019 The author used a quantitative research method, and the regression results were estimated for panel data by pooled regression model (POLS), fixed-effects model (FEM), random effects model (REM), and generalized least squares (GLS) estimate The authors argued that the credit risk was impacted by loan growth with U shape, and bank size with inverted-

U shape

Vinh (2016) determined the influence of bank capital on profitability and

credit risk of Vietnamese commercial banks The research data was a sample of 30 Vietnamese commercial banks from 2007 to 2014, it was collected from annual reports, financial statements of commercial banks The empirical result showed a clear influence of bank capital on profitability and credit risk of commercial banks Besides, bank capital also had a negative impact on credit risk

Nguyen & Dinh (2021) analyzed the elements affecting the credit risk and

insolvency risk in the Vietnamese banking industry The research data was a sample

of 25 Vietnamese commercial banks over the period of 10 years, from 2008 to 2017

to investigate the relationship between internal and external variables and bank risk Research data was collected from both the yearly report of banks whereas macroeconomic variables were collected from the World Bank database By using the pooled OLS, fixed Effect Model (FEM), random Effect Model (REM) and GMM method, the empirical results showed that all elements had an effect on bank risks, except for the liquidity ratio

Anh & Phuong (2021) determined the effect of credit risk of financial

stability of commercial banks operating in Vietnamese stock market The research data of this study included 27 Vietnamese commercial banks between 2010 and

2019, and it was collected from BankScope and the World Bank The authors used the DGMM method to investigate the impact of credit risk on financial stability of Vietnamese commercial banks From the empirical results, the authors argued that there was a negative relationship between non-performing loans and the financial stability of commercial banks In addition, the equity on asset ratio, the return on equity, the size of the bank and all of macroeconomic variables also affected the financial stability of Vietnamese commercial banks

2.4.2 Review of foreign research paper

Rabab’ah (2015) examined the lending determinants of commercial banks

in Jordan This study uses a sample of 10 Jordanian commercial banks from 2005 to

2013 The author used a dependent variable, which is the ratio of credit lines to total

assets, and 11 independent variables including bank-specific variables and macro variables Through the research results, the author showed that the ratio of non-performing loans, liquidity ratio and window rate had a negative and significant effect on the ratio of credit facilities while bank size and GDP had a positive and significant relationship with the ratio of credit facilities of commercial banks in Jordan

Imran & Nishat (2013) investigated bank determinants credit in the case of

an emerging economy like Pakistan The research data was collected from various sources such as Banking Statistics of Pakistan, World Development Index (WDI) and the International Financial Statistics (IFS) The empirical results showed that the foreign liabilities, domestic deposits, economic growth, exchange rate, and the monetary conditions of the country significantly affected the banks for credit issuance to the private sector in the long run Meanwhile, the inflation and money market rate didn’t influence the private credit In addition, authors also argued that the financial health and liquidity of the banks played a functional role in the determination of loan

Haryono, Ariffin & Hamat (2016) examined the factors affecting the credit

risk of 11 full-fledged Islamic banks and 22 Islamic business units in conventional banks between 2004 and 2012 The authors used the bank-specific variables which were selected from financial statements of Islamic banks and macroeconomic variables which were obtained from World Bank and Bank Indonesia Statistics The research results showed that GDP and the unemployment rate with a one-year lag had a strong impact non-performing loans, whereas bank-specific variables such as bank’s diversification and financing structure had a pros effect on the problem financing although its direction was not as expected

Al-Wesabi & Ahmad (2013) identified determinants of credit risk of

Islamic banks in the Gulf Cooperation Council countries The research data of this study was a sample of 25 Islamic banks over a five-year period, from 2006 to 2010

The authors used the non-performing loans as a proxy for credit risk, which is a dependent variable alonged with three macroeconomics, and six specific independent variables From the empirical results, the authors argued that income had a detrimental relationship with credit risk Besides, the research results also showed that leverage, liquidity were also relevant variables for credit risk, which results are also consistent with bank behavior reported in previous researches In addition, credit risk was influenced by both macroeconomic and firm-specific factors, except for inflation and interest rates

Nabila & Younes (2011) examined the internal and external elements

affecting credit risk of commerical banks in Tunisia The research data was a sample of 10 commercial banks listed on the Stock Exchange of Tunis over the period of 14 years, between 1995 and 2008, and the research data was collected from many soures The research results showed that the public ownership increased the bank credit risk whereas the prudential regulation of capital declined the credit risk of Tunisian commercial banks Besides, the authors also argued that the ratio of return on assets had a positive relationship with credit risk while the ratio of capital adequacy had a negative impact on credit risk

Mwaurah (2013) determined the elements affecting credit risk in

commercial banks in Kenya The research data of was a sample of 20 commercial banks over the period of 10 years, from 2003 to 2012 The author used the statistical Package for Social Science (SPSS) and specific statistical method such as multiple Linear regression analysis to analyzed determinants of credit risk of commercial banks in Kenya From the empirical results, the author argued that credit risk was significantly affected by GDP, inflation, interest rates,unemployment, stock performance and management efficiency

Tehulu & Olana (2014) analyzed the bank-specific elements affecting the

credit risk of Ethiopian commercial banks The research data was a sample of a group of 10 commercial banks over the period of 5 years, between 2007 and 2011

Research data was the secondary data, and it was collected from the annual reports

of each commercial Bank and from the central bank of Ethiopia (NBE) The empirical results showed that credit growth and bank size had a detrimental and statistically significant effect on credit risk Meanwhile, the operating inefficiency and ownership had positive and statistically significant effect on credit risk of Ethiopian commercial banks Finally, the authors also argued that the profitability, capital adequacy and bank liquidity had detrimental but statistically insignificant relationship with credit risk

Misman & Bhatti (2020) analyzed important problems related to credit risk

in Islamic banks in nine countries of the Association of Southeast Asian Nations (ASEAN) and Gulf Cooperation Council (GCC) The research data was a sample of

40 different Islamic banks from ASEAN region and five from GCC countries over the period of 12 years, from 2000 to 2011 The authors argued that regulatory capital significantly reduced the credit risk exposure adherence to the minimum regulatory capital requirements which help IBs to manage credit risk exposures

Table 1.1 Summary table of prior research studies

1 Ngo, Le &

Le (2021)

23 Vietnamese joint stock commercial banks

GMM method

(i) Lagged credit risk, profitability and inflation had positive relationship with credit risk

(ii) Bank capital, bank size, economic growth and loans to deposits ratio had negative effects

on credit risk

2 Quy & Toan

(2014)

26 commercial banks over the period of 4

GMM method

Lag variables such credit risk variable, loan growth, and GDP growth rate with the lag length of one year impact significantly the

between 2010 and 2015

GMM method

(i) The non-performing loans had a negative relationship with profitability, credit growth, loan to deposit ratio, equity, and bank size but

it had a positive impact on the lag of performing loans

non-(ii) The macroeconomic determinants had a significant influence on loan quality of the commercial banks

(iii) Fiscal and income tax variables have a statistically significant effect on non-performing loans

Vietnam

Pooled OLS, FEM, REM model; and GLS method

The credit risk was impacted by loan growth with U shape, and bank size with inverted-U shape

5 Vinh (2016)

30 Vietnamese commercial banks from

2007 to 2014

S-GMM method

(i) A clear influence of bank capital on profitability and credit risk of commercial banks

(ii) Bank capital also had a negative impact

on credit risk

6 Nguyen &

Dinh (2021)

25 Vietnamese commercial banks over the period of 10

Pooled OLS, FEM, REM model; and

All elements had an effect on bank risks, except for the liquidity ratio