Banking stability in a time of crisis
During the COVID-19 pandemic, financial institutions worldwide faced declining borrower income, business disruptions, and heightened uncertainty. In Indonesia, the banking sector was also affected, yet state-owned banks retained relatively strong public trust due to government backing.
This context made the relationship between funding, credit risk, and profitability especially relevant. Understanding how these factors interacted during crisis and recovery helps policymakers and bank leaders design strategies for future economic shocks.
Paradigma and Suharto focused on two key determinants of bank performance:
- Third-Party Funds (TPF): deposits from customers such as savings, current accounts, and time deposits
- Non-Performing Loans (NPL): loans where borrowers fail to meet repayment obligations
Both indicators directly influence liquidity, risk exposure, and the capacity of banks to generate profit.
How the research was conducted
The researchers analyzed annual financial reports from five Indonesian state-owned banks covering the period 2019–2024. This timeframe allowed them to observe banking performance before, during, and after the COVID-19 crisis.
Using a quantitative panel-data approach, they examined how changes in deposits and credit risk correlated with profitability, measured by Return on Assets (ROA). The method combines cross-bank comparisons with multi-year trends, enabling a broader view of structural changes in the banking sector.
The analysis relied on secondary financial data and statistical modeling to identify relationships between funding capacity, loan quality, and profit generation.
Key findings
The results reveal clear patterns in how Indonesian state-owned banks maintained profitability during economic disruption.
Public deposits strengthen profitability
Third-party funds showed a moderate positive relationship with ROA. Banks that successfully attracted customer deposits had greater capacity to expand lending and generate interest income. This confirms the central role of financial intermediation: deposits fuel credit, and credit generates earnings.
Credit risk reduces profit, but impact is limited
Non-performing loans displayed a negative relationship with ROA, meaning rising credit risk erodes profitability. However, the effect was relatively small during the study period. Government restructuring programs likely helped stabilize loan performance and prevent sharper declines in bank income.
Funding capacity matters more than credit risk
Compared to NPL, third-party funds had a stronger influence on profitability. This suggests that the stability of customer deposits was a key factor in maintaining bank performance through the pandemic and recovery phase.
Why these findings matter
Indonesia’s state-owned banks play a dual role as commercial institutions and policy instruments supporting national development. Their ability to remain profitable during economic turbulence affects lending capacity, investment flows, and overall financial stability.
The research highlights that maintaining public trust and deposit growth is essential for resilience. When households and firms continue to store funds in banks, liquidity remains stable and lending can continue even in uncertain times.
At the same time, the study underscores that credit risk management remains critical. Although the observed impact of NPL was relatively small, persistent loan deterioration can still weaken long-term performance.
Real-world implications
The findings offer practical insights for multiple stakeholders:
Academic insight from the researchers
Paradigma and Suharto emphasize that profitability depends on balancing funding strength and risk control. As they explain, banks generate income when deposits are efficiently transformed into productive loans, but poor credit quality can offset those gains. Their analysis shows that resilience emerges when strong deposit growth is matched with prudent lending practices.
Author profiles
Revfitra Mutahar Paradigma holds expertise in banking performance and financial management and is affiliated with AFBI Perbanas, Jakarta. His research focuses on profitability determinants, financial intermediation, and institutional resilience.
Eduardus Suharto, also from AFBI Perbanas, specializes in financial economics and banking systems, with research interests in credit risk, financial stability, and institutional performance.
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