The impact of natural disasters on non-performing loans of bank and sustainable solutions: Case study in Vietnam

Abstract

Natural disasters, including earthquakes, floods and storms, often interrupt economic operations, resulting in heightened rates of loan defaults. This research investigates the effects of natural calamities on the prevalence of non-performing loans within commercial banking institutions in Vietnam. Employing a dataset spanning from 2008 to 2023, the research utilizes quantitative analytical technique such as GMM. By assessing the material damages and vulnerable loan structure attributed to natural disasters as associated costs, and two dummy variables representing the COVID-19 pandemic and major storms, the ensuing conclusions are derived from the empirical data collected during the investigation. Material damage due to natural disasters, especially in sensitive sectors such as agriculture, forestry, fisheries, tourism and entertainment, reduces the ability to pay, leading to an increase in non-performing loans. The COVID-19 pandemic and major storms also contribute to strengthening the above results, showing a positive correlation with non-performing loans. Furthermore, bank-specific factors and macroeconomic indicators also exert considerable influence on the NPL ratio. One implication from the findings in this research is that the increase in non-performing loans are not only dependent on unexpected factors, capital reserves or external support but also requires close coordination between internal risk management and the ability to mobilize external resources. This research underscores the imperative of formulating comprehensive risk management frameworks and disaster preparedness plans to mitigate the adverse repercussions of these occurrences on the loan portfolios of financial institutions. At the same time, the research also shows that sustainable development, including investing in vulnerable sectors with advanced technologies and promoting green loans, can help reduce financial risks and promote long-term stability. The findings of this research contribute to the existing literature regarding financial stability and disaster risk management, providing insights for policymakers and banking regulators to enhance resilience to natural disasters.