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Bad debt and cost efficiency in Vietnamese commercial banks

The paper aims at exploring the relationship between bad debt and cost efficiency in Vietnamese commercial banks in the years 2007–2013. The results show that the cost efficiency in Vietnamese commercial banks is 52.6% and there exists a direct relationship between bad debt and cost efficiency. | Nguyen Thi Hong Vinh. Journal of Economic Development 22(1), 125 – 140 125 Bad Debt and Cost Efficiency in Vietnamese Commercial Banks NGUYEN THI HONG VINH Banking University HCMC - hongvinhnguyenvn@gmail.com ARTICLE INFO ABSTRACT Article history: The paper aims at exploring the relationship between bad debt and cost efficiency in Vietnamese commercial banks in the years 2007 – 2013. The research includes two stages: (i) Measuring the cost efficiency of banks by non-parameter Data Envelopment Analysis (DEA) method suggested by Coelli (2005); and (ii) Applying the Tobit model to identify two-way effects of bad debt and bank cost efficiency. The results show that the cost efficiency in Vietnamese commercial banks is 52.6% and there exists a direct relationship between bad debt and cost efficiency. Received: July 31 2014 Received in revised form Oct. 29 2014 Accepted: Dec. 30 2014 Keywords: Bad debt, cost efficiency, Tobit, Vietnamese commercial banks Nguyen Thi Hong Vinh. Journal of Economic Development 22(1), 125 – 140 126 1. Introduction Vietnam’s economic reform and growth have stagnated due to the accumulation of bad debt in the banks. According to the SBV, the proportion of bad debt in the period 2007–2013 has increased compared with the previous years (Fig. 1). 5.00% 4.50% 4.35% 4.00% 3.50% 3.50% 3.20% 3.00% 2.50% 3.61% 2.47% 2.00% 2.00% 2.20% 1.50% 1.00% 0.50% 0.00% 2007 2008 2009 2010 2011 2012 2013 of badcủa debt of Vietnamese TỷProportion lệ nợ xấu các NHTMBanks Việt Nam Fig. 1. Proportion of bad debt of vietnamese commercial banks in 2007-2013 Source: SBV (2014) Meanwhile, competition from both local and foreign banks forces Vietnamese commercial banks to be more effective in the new environment. Banks with poor performance will be driven out by more effective ones and the most effective banks will have many competitive advantages. The study questions how the relationship between bad debt and cost efficiency in Vietnamese .