The impacts of funding diversity and liquidity creation on non-performing loans in Vietnam: Evidence from panel data regression

Abstract

This study investigates the effect of bank liquidity creation on non-performing loans in Vietnam. We employ the Generalized Method of Moments to analyze a sample of 33 Vietnamese commercial banks from 2009 to 2020. The results show that banks with higher liquidity creation are exposed to additional non-performing loans. We also figured out that bank funding diversity positively affects non-performing loans. Our findings are also robust even if we employ alternative proxies of risks such as Z-score and the ratio of loan loss reserves to total loans. Finally, our study provides recommendations for bank managers in general management and strategic management. Banks should focus on diversifying their liquidity strategies to reduce non-performing loans while generating revenue through lending. A diversified funding source will enhance their banking activities, profitability, and risk management. While banks can increase lending capacity with more capital, they must prioritize loan quality and effective risk management to withstand economic instability. Additionally, bank managers must monitor economic factors, such as inflation and unemployment, to navigate market volatility and maintain informed decision-making.