Collateral Quality and Loan Default Risk: The Case of Vietnam

Le, Chau and Nguyen, Hieu L. (2019) Collateral Quality and Loan Default Risk: The Case of Vietnam. Comparative Economic Studies, 61 (1). pp. 103-118. ISSN 0888-7233

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Collateral Quality and Loan Default Risk: The Case of Vietnam
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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
Subjects:N Business and Administrative studies > N310 Banking
N Business and Administrative studies > N300 Finance
Divisions:Lincoln International Business School
ID Code:36926
Deposited On:09 Sep 2019 09:57

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