Bank efficiency in Vietnam: Do scale expansion strategies and non‐performing loans matter?

In Vietnam, following the process of financial liberalization, the rapid banking expansion has resulted in structural frangibility and bad debt proliferation with negative implication for bank performance. This is the first comprehensive study that evaluates the performance of the Vietnamese banking system at the start of the Global Financial Crisis in 2008 up to 2016. We show that the Vietnamese banking system experienced a downward trend in technical efficiency over the liberalization period. However, there persists an efficiency gap among banks with different ownership structure, suggesting that privatization matters for performance improvement. One of the major contributions is the analysis of the impact of non‐performing loans on bank performance. We argue that this category of loans and bank size have nonlinear effects on the estimated efficiency levels. Medium‐sized banks are more efficient than big and small banks. This finding implies that the ongoing restructuring scheme pushing banks' scale expansion via capital build‐up should be carefully taken into consideration.