Factors affecting lending behavior of Vietnamese commercial banks

LIST OF DRAWINGS

Figure 3.1 Proposed research diagram 16

SUMMARY

This study aims to examine and confirm the factors affecting the lending behavior of commercial banks in Vietnam. With the dependent variable being the total lending of banks (Vl) representing the lending behavior of commercial banks and the independent variables being the total mobilization of commercial banks (Vd), lending interest rate (Ir), required reserve ratio (Rr) and gross domestic product (GDP), the hypothesis is that there is a relationship between the dependent variable and the independent variables. Using the Johansen cointegration method, the vector error correction model VECM with quarterly data in the period 2003 - 2012, the regression results show that total mobilization has the greatest influence on the lending behavior of banks with a positive relationship consistent with the theory. The required reserve ratio has a negative relationship as the theory but the negative relationship between GDP is not as predicted by the theoretical model. Besides, lending interest rates have no relationship with lending behavior of Vietnamese commercial banks.

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Keywords: bank, credit, lending behavior, VECM model.

1. INTRODUCTION

Lending is a traditional business activity of commercial banks. In this activity, commercial banks provide short, medium and long-term loans to individuals and organizations, allowing them to participate in investment and development activities, contributing to supporting their growth in particular and the growth of the economy of a country in general. Due to the importance of this activity to the socio-economic development of the country, in their resource allocation programs, countries cannot ignore this credit channel. And commercial banks always play the role of the most important financial resource allocation organization in these programs.

However, commercial banks are also business organizations, so their activities are not outside the goal of profit. Bank loans to customers are based on the principles of evaluating the profitability of the lending project, the ability to pay and repay the debt of the customer. In addition, there are many factors that affect the bank's lending decisions such as macro variables: interest rates, money supply, gross domestic product, exchange rates, etc.; factors related to the characteristics of the bank such as: capital sources, liquidity, business strategies of the bank, quality of human resources, management capacity, etc. In addition, factors related to the relationship between the bank and the customer are also mentioned.

The birth of commercial banks in the world is associated with the development of the commodity economy. And bank lending activities originated from the capital needs of merchants expanding production and business during the industrial revolution. Up to now, it has been hundreds of years.

For the Vietnamese economy, commercial banks were born quite late and have many differences. Commercial banks in Vietnam were born in the spirit of the State Bank Ordinance and the Credit Institutions Ordinance in 1990, after the first strong reform in the Vietnamese financial and banking system in 1988. Before that, the banking system was a single-level system with the State Bank performing the functions of both commercial banks and the State Bank. The two specialized banks, the Bank for Foreign Trade of Vietnam (Vietcombank) and the Bank for Investment and Development of Vietnam (BIDV), are state-owned and directly controlled by the state. The entire banking system is a tool to implement state policies, meeting the financial needs of the budget and state-owned enterprises. Bank lending activities are directed credit with low nominal interest rates.

The reform of the financial system in 1988, along with the establishment of commercial banks in 1990, marked a major change in the financial sector. However, lending activities in particular and other banking activities in general have not yet made significant progress. The State Bank still tightly controls the banking system through interest rate tools and many other measures. The State Bank's policies help commercial banks maintain a profit margin but are not beneficial to depositors, causing slow growth in deposit mobilization and a high cash ratio in the money supply. Along with that is directed credit to ensure that priority areas of the government receive loans at moderate interest rates. Banks therefore operate without market mechanisms, without competition, and are weak in governance. After a long period of interest rate liberalization in the late 1990s, along with the impacts of the 1997 financial crisis, interest rate regulations were gradually loosened, initially creating a mechanism for negotiating lending interest rates with customers. And by the year

In 2002, interest rate constraints in Vietnam were completely removed. Bank lending activities became more flexible and followed market mechanisms.

Lending activities based on market mechanisms and credit principles since 2002 have made great contributions to the country's economic development. However, in recent years, the situation of bad debts increasing rapidly in the banking system, the illiquidity of some banks and ineffective business operations after a period of hot growth of the economy in general and the banking sector in particular, along with the impact of the global economic crisis that has not ended, have led to the government's re-intervention in the banking system. The restructuring program of the banking system has been and is in the process of implementation. In particular, the problem of bad debts in the banking system is the hottest topic. Based on this reality, research on the banking sector and lending activities to create a practical basis for the restructuring process and guide the lending activities of banks has become urgent.

This study clearly identifies the problem to be studied as the lending behavior of commercial banks with the proxy variable for lending behavior being the total lending variable (Vl). Using the Johansen cointegration method and the vector error-correcting model VECM for the quarterly data series from 2003 to 2012, the study answers the following questions:

First, is there a relationship between the variables total deposits, lending rates, required reserve ratios, and gross domestic product with total commercial bank lending?

Second, if it does exist, what is this relationship like?

The purpose of the study is to examine and confirm the factors affecting the lending behavior of Vietnamese commercial banks in order to provide practical and in-depth insights into bank lending behavior.

The research results show that the variables total mobilization, required reserve ratio and GDP all have an impact on the lending behavior of commercial banks. In which, total mobilization has the greatest impact, consistent with the theory of credit channels. The required reserve ratio has an inverse relationship as expected and is statistically significant. Although lending interest rates have an inverse impact as expected by the theoretical model, the results are not statistically significant, leading to the conclusion that there is no relationship between lending interest rates and lending behavior of commercial banks. In addition, a notable result is the inverse relationship between GDP and total lending, contrary to the expectations of theory and previous studies in the world.

The rest of the study is organized as follows: the next section presents an overview of previous studies on the lending behavior of commercial banks in the world and in Vietnam. Section three presents the research methodology and describes the data used in the study. Section four describes the research results and finally section five: conclusions.

2. OVERVIEW OF PREVIOUS STUDIES

2.1 Theoretical basis

2.1.1 Debt pricing theory

According to Modigliani and Miller (1958), funds are available for positive NPV projects and the value of the firm is independent of its capital structure. The decision to finance internally or externally is the same in a world with efficient capital markets and no asymmetric information, costs and taxes. MM's argument is controversial and has generated a lot of research for the real world debate. Many studies have shown that the real world is inefficient. Firms have many incentives to use external financing. Therefore, determining capital structure is very important for companies as well as banks. Besides, bank lending is not simply based on the assessment of the NPV of the project and funds are not always available to firms.

In the financial field, Stiglitz and Weiss (1981) implied that the credit market is inefficient due to information asymmetry. He proposed the loan pricing theory that in pricing loan interest rates, banks cannot set a high interest rate to seek profits but should consider adverse selection problems because it is difficult for banks to accurately evaluate customers.

2.1.2 Bank credit channel theory

Bernanke and Blinder (1988); Friedman (1991); Van den Heuvel (2003) presented the theory of bank lending channel based on the imperfection of credit market, emphasizing the role of required reserve ratio in banking activities.

According to the theory of the bank credit channel, a monetary tightening affects bank lending because the fall in deposits cannot be fully offset by other forms of “non-reserve” funding. Therefore, a necessary condition for the credit channel to function is a well-functioning “non-reserve” asset market. Conversely, if banks have the ability to issue unlimited certificates of deposit and bonds, which have no reserve requirement, the bank credit channel will be ineffective.

Contrary to the above argument, Kashyrap and Stein (1995,2000) and Stein (1998) argue that the debt market is imperfect. Since “non-reserve assets” are not insured and there is information asymmetry about the value of the bank’s assets, investors will demand a risk premium. In this case, bank capital plays an important role because it affects the bank’s rating and provides investors with a “creditworthiness” guarantee. Therefore, the cost of this “non-reserve” source of funding (e.g. bonds, certificates of deposit) will be higher for banks with small capital. Banks with small capital are more sensitive to information asymmetry and are less likely to establish credit relationships (Kishan and Opiela (2000)).

2.1.3 Bank capital channel theory

Thakor (1996); Bolton and Freixas (2001) and Van den Heuvel (2001a) present the bank capital channel theory arguing that banks will reduce lending due to capital adequacy regulations.

The bank capital channel theory is based on three hypotheses. First, credit markets are imperfect: banks cannot easily raise capital due to the presence of agency costs and tax disadvantages (Myers and Majluf (1984), Stein (1998), Calomiris and Hubbard (1995), Cornett and Tehranian (1994)). Second, banks face interest rate risk because their assets

Factors affecting lending behavior of Vietnamese commercial banks - 2

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