Household Borrowing in Vietnam: A Comparative Study of Default Risks of Informal, Formal and Semi-Formal Credit

This paper contributes to the empirical literature on default risk in developing countries. Using household data for Vietnam, it:

• Examines differences in default risks for formal, informal and semiformal loans;
• Analyzes the determinants of default risks regarding the three credit sources.

The document lists some of the findings of the analysis:

• There are several key determinants of credit choices:
  • Smaller-sized households with collateral and/or a guarantor borrow primarily from formal and semi-formal lenders;
  • Female contractors, large-sized households and borrowers without collateral or a guarantor mainly rely on informal lenders.
• The level and determinants of default risk of different types of lenders differ:
  • Informal lenders face a higher default risk than formal and semi-formal lenders.
• Borrowing from relatives, which often occurs in the informal sector, substantially lowers default rates.

Further, the paper identifies some loan contract items that are particularly relevant in determining default risk of formal credit, such as:

• The loan maturity;
• The loan interest rate.

The paper also reveals one drawback of the research:

• All the formal informal, formal, and semi-formal sectors involve a lot of actors with distinctive roles. The paper ignores these variations and merges the different lenders.