The research focuses on KBMI IV banks, Indonesia’s highest banking category based on core capital. This group includes Bank Rakyat Indonesia (BRI), Bank Central Asia (BCA), Bank Mandiri, and Bank Negara Indonesia (BNI). Together, these institutions dominate the country’s banking assets, deposits, and loan distribution, making their financial health critical to Indonesia’s economic stability.
The findings are significant because non-performing loans remain one of the most important indicators of banking sector resilience. High levels of bad loans can weaken profitability, reduce lending capacity, and increase risks to the broader financial system.
Why Non-Performing Loans Matter
Banks serve as financial intermediaries, collecting funds from savers and channeling them into loans for households and businesses. When borrowers fail to repay their loans, banks face increased credit risk, reflected in their NPL ratios.
Indonesia’s banking industry maintained relatively healthy NPL levels before the COVID-19 pandemic. However, economic disruptions during 2020 and 2021 increased pressure on borrowers and contributed to rising credit risks. Although loan quality improved during the post-pandemic recovery period, policymakers and financial institutions continue to monitor NPL trends closely.
For large banks such as those in the KBMI IV category, changes in credit quality can have implications beyond individual institutions. Because these banks play a central role in financing economic activity, their performance influences financial stability across the country.
Examining a Decade of Banking Data
The researchers analyzed quarterly banking data covering the period from 2015 to 2024. The study used official data from Bank Indonesia and the Financial Services Authority (OJK).
Rather than focusing on a single factor, the research examined three variables commonly linked to credit quality:
- Credit Growth
- Loan to Deposit Ratio (LDR)
- Bank Indonesia’s benchmark interest rate (BI7DRR)
Using panel data analysis, the researchers evaluated how changes in these variables affected non-performing loans across Indonesia’s largest banks over time.
Credit Growth Linked to Lower Bad Loans
One of the study’s most notable findings is that credit growth has a negative and statistically significant relationship with NPLs.
In practical terms, higher lending growth was associated with lower levels of bad loans.
This result challenges the common assumption that rapid lending expansion automatically increases credit risk. According to the researchers, KBMI IV banks appear to maintain strict credit screening and risk management practices even while expanding their loan portfolios.
As a result, additional lending is directed toward borrowers with stronger financial conditions and greater repayment capacity.
The study suggests that effective credit assessment, continuous monitoring, and prudent lending policies have allowed large Indonesian banks to expand financing without sacrificing asset quality.
Higher LDR Also Associated with Better Credit Quality
The study found a similar pattern for the Loan to Deposit Ratio (LDR), which measures how much of a bank’s collected deposits are converted into loans.
LDR showed a negative and significant effect on NPLs, indicating that banks with higher levels of fund utilization tended to record lower bad loan ratios.
While a high LDR is sometimes viewed as a potential liquidity risk, the findings suggest that KBMI IV banks have been able to balance lending growth with effective risk controls.
According to the researchers, stronger loan distribution does not necessarily mean riskier lending. Instead, it may reflect efficient allocation of funds to qualified borrowers and productive sectors of the economy.
The results also highlight the role of regulatory oversight by OJK and Bank Indonesia in ensuring that banks maintain prudent lending standards while supporting economic growth.
Interest Rates Show Limited Direct Impact
Unlike credit growth and LDR, the benchmark interest rate did not have a statistically significant individual effect on NPLs.
Economic theory often suggests that rising interest rates increase borrowing costs and may weaken borrowers’ ability to repay loans. However, the study found that this mechanism was not strong enough to significantly influence NPL levels among KBMI IV banks.
Several factors may explain this outcome.
Many bank loans are medium- or long-term contracts with relatively stable interest structures. In addition, banks evaluate borrowers’ repayment capacity before extending credit, reducing the immediate impact of interest rate fluctuations on loan performance.
As a result, changes in benchmark rates alone were not a major determinant of bad loan levels during the study period.
Credit Quality Depends on Multiple Factors
Although interest rates were not significant on their own, the study found that credit growth, LDR, and interest rates collectively had a significant impact on NPLs.
The model explained approximately 51.5 percent of the variation in non-performing loans observed across the sample.
This finding reinforces the idea that credit quality is shaped by a combination of lending strategy, liquidity management, and broader financial conditions rather than by any single variable.
As Eclesia Eva Celia Putri and Tony Seno Aji of the State University of Surabaya explain, successful credit expansion depends not only on increasing loan volumes but also on maintaining borrower quality, monitoring risk exposure, and managing liquidity effectively.
Implications for Banking and Policymaking
The study offers several practical implications for Indonesia’s banking sector.
For commercial banks, the findings suggest that loan growth can remain sustainable when supported by careful borrower selection and strong risk management systems. Expanding lending does not necessarily increase bad loans if banks maintain disciplined underwriting standards.
For regulators, the results emphasize the importance of monitoring credit quality and liquidity conditions alongside monetary policy measures. Effective supervision of lending practices may be just as important as interest rate adjustments in maintaining financial stability.
The research also provides useful evidence for investors, policymakers, and business leaders seeking to understand the factors that influence banking sector resilience in emerging economies.
Author Profiles
Eclesia Eva Celia Putri is a researcher from the Faculty of Economics and Business, State University of Surabaya (UNESA), Indonesia. Her academic interests include banking economics, credit risk management, and financial system stability.
Tony Seno Aji is a lecturer and researcher at the Faculty of Economics and Business, State University of Surabaya (UNESA). His expertise includes monetary economics, banking policy, financial management, and economic development.
Source
Article Title: The Effect of Credit Growth, LDR and Interest Rates on Non-Performing Loans (NPL) in KBMI IV Banks in Indonesia
Journal: Formosa Journal of Multidisciplinary Research (FJMR)
Publication Year: 2026
Authors: Eclesia Eva Celia Putri and Tony Seno Aji
DOI: https://doi.org/10.55927/fjmr.v5i5.73
Journal URL: https://journalfjmr.my.id/index.php/fjmr
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