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Collateral Quality and Loan Default Risk: The Case of Vietnam

Chau Le () and Hieu L. Nguyen ()
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Hieu L. Nguyen: University of Economics HCMC

Comparative Economic Studies, 2019, vol. 61, issue 1, 103-118

Abstract: Abstract In the transition economy of Vietnam, financial market is dominated by banking sector but commercial banks heavily rely on collateral-based lending. While the relationship between collateral and implied credit risk is still in debate, this paper provides additional empirical evidence regarding the heterogeneous effects and transmission channels of collateral characteristics on loan delinquency. Applying instrumental variable probit analysis on a unique dataset of 2295 internal loan accounts in Vietnam, we find the significantly negative impact of collateral quality on the probability of default of consumer loans, supporting the dominance of borrower selection and risk-shifting over lender selection effects. The finding implies that high-quality collateral not only signals more credible borrower but also fosters good behavior in using loan, enabling bank to mitigate adverse selection and moral hazard problems.

Keywords: Bank loan; Collateral-based lending; Collateral characteristics; Risk-shifting effect; Probability of default; Vietnam (search for similar items in EconPapers)
JEL-codes: G20 G21 C18 (search for similar items in EconPapers)
Date: 2019
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