REVIEW
of
FINANCE -
November, 2018
25
fact that credit is still the greatest threat to most
organizations, the application of hypotheses to
portfolio investment in credit opportunities has
declined (Margrabe, 2007). Companies realize how
credit regulation can affect budget execution. As a
result, many different banks are finding effective
ways to quantify credit risk. This industry is also
becoming an important foundation in the creation
of credit risk measurement instruments in a
portfolio setting (Kairu, 2009).
Typically, banking associations have adopted
a resource-based strategy to manage credit
opportunities. While the technology of each
organization changes over the time, this approach
includes assessing the nature of credit risks,
applying credit ratings, and accumulating the
results of this test to distinguish the normal risks
of the portfolio. Establishment of a resource-based
approach is a good credit way and a credit risk
framework in the country to mange credit. This
legal framework allows administrators to recognize
changes in personal credits, or investments in
their appropriate manner. In view of the different
stages, credit checks, credit surveys and credit risk
management, credit management frameworks can
fundamentally change the portfolio procedures.
Although the benefits of a resource-based
approach are fundamental to monitor credit
opportunities, it does not look at a comprehensive
view of portfolio credit risks. Then, in order to
raise awareness of credit risks, organizations hope
MICRO-DETERMINALS OF NON-PERFORMING LOANS:
EVIDENCE FROMVIETNAMESE BANKS
NGUYEN KIM QUOC TRUNG, NGUYEN THI PHUONG DUNG
- Foreign Trade University – Ho Chi Minh City Campus*
The main purpose of this study is to model the key factors affecting non-performing loan (NPL) incurred
in lending activities in Vietnamese joint stock commercial banks during the period from 2010 to 2017.
The research uses the quantitative regression methods such as pooled OLS regression, fixed effect model
and random effect model in order to construct the model. The results show that the return on equity (ROE)
is statistically significant at 95% confidence level because the p-value is less than 5% and this variable
also has the negative effect on NPL. Although the variable minimum capital adequacy ratio (CAR) is not
statistically significant, it is negatively correlated to NPL.
Keywords: Non-performing loan, return on equity, minimum capital adequacy ratio
Received: August 6
th
, 2018
Revised: September 27
th
, 2018
Accepted for publication: October 5
th
, 2018
Theoretical framework
The increase in NPL in the banking sector may
be due to external factors, such as the unfavorable
situation in economic activities (Berger and
DeYoung, 1997). Berger and DeYoung (1997) also
argued that the efficiency of banks can affect
risky debts (NPL) in the banking sector. Bad
management hypothesis was developed to explain
this relationship. Berger and DeYoung (1997)
argued that the poor management would lead to a
decline on bank efficiency and the quality of bank
assets, which had a negative impact on the loan
process i.e. the lending procedures are loose. Banks
may not thoroughly evaluate their credit records
caused by lack of poor appraisal skills. In addition,
asymmetric information issuesbetween lenders and
borrowers continue to complicate issues. Besides,
management may not be effective in managing the
loan portfolio. This leads to lower credit ratings for
approved loans and higher probability of higher
NPL. Therefore, the ineffective credit management
of banks can lead to bad loans, or NPL.
Theory of investment portfolio
Organizations have linked the current portfolio
hypothesis to market risks since 1980s. Many
organizations are currently using risk models
to deal with loans and market risks. Despite the
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