Unveiling the effect of non-performing loans on lending behaviour: Evidence from Vietnam’s banking system

Abstract

This study shows how non-performing loans (NPLs) and other variables specific to banks affect loan growth and the risk-weighted composition of assets in the Vietnamese banking sector. We use a large panel dataset of Vietnamese commercial banks from 2008 to 2022 and different econometric estimators to look at how NPLs, loan loss provisions (LLPs), and bank-specific factors affect how banks lend money. Additionally, we conduct a sensitivity analysis to bolster the robustness of our empirical findings. Our analysis reveals a statistically significant inverse relationship between NPLs/LLPs and loan growth rates, underscoring the critical role of effective credit risk management. Furthermore, institutional characteristics such as bank size, liquidity position, profitability metrics, and tangible asset ratios substantially influence lending patterns and risk exposure. Conversely, macroeconomic and broader institutional factors demonstrate mixed effects, with many exhibiting statistical insignificance. This study addresses a notable gap in the extant literature concerning the determinants of bank lending behaviour in Vietnam, offering nuanced insights into the role of credit risk indicators and bank-specific attributes. Our findings yield substantial implications for regulatory bodies, policymakers, and banking executives in their pursuit of enhancing the stability and operational efficiency of Vietnam's financial system. By elucidating these relationships, our research contributes to the ongoing discourse on banking sector dynamics in emerging economies. It provides an empirical foundation for informed decision-making in financial policy and risk management strategies.