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Applying SFA and DEA in Measuring Banks Cost Efficiency in Relation to Lending Activities: The Case of Vietnamese Commercial Banks

Vietnam's economy heavily relies on credit from the banking sector in the absence of other sources, which requires the state bank need to closely monitor lending to minimize bad debts. Loans play an important role in earning profit and efficiency of the bank. However, a bigger amount of loans may cause higher cost spent to monitor loans and manage the bigger loan portfolio. It is obvious that problem loans negatively affect both profit efficiency and cost efficiency of the bank. This study is, therefore, examining the impact of loans on cost efficiency in the context of Vietnamese commercial banks. Data of 25 Vietnamese commercial bank from 2010 to 2017 were collected and analyzed. In first step Stochastic frontier analysis (SFA) was used to measure cost efficiency. Following, we examine if the bank loan has any effect on cost efficiency by using regression and finally, Data envelopment analysis (DEA) window model was applied to evaluate bank cost efficiency and make a comparison. The results found in this paper indicated that during 2010-2017, 25 sample Vietnamese commercial banks perform well in term of cost efficiency with an average efficiency score range from 0.8 to 0.9. In addition, results also found a strong consistency between SFA and DEA Window in measuring cost efficiency. Our results also indicated that bank loans found to have a significantly negative effect on bank cost efficiency. Findings of this study can provide important insights for bankers in managing their cost efficiency. Moreover, findings of this study also suggested that results obtained from SFA and DEA are consistent, which enables researchers to have greater confidence in choosing the method measuring bank efficiency. Furthermore, this study is expected to be the first empirical study on the relationship between loans and cost efficiency of the bank; therefore, it shed a light on literature for the new aspect of bank efficiency.