Blitar — Internal control systems remain one of the most important safeguards against bad loans in the banking industry, but their implementation is still far from optimal. This is the key finding of a 2026 study by Joko Purnomo and Diana Elvianita Martanti from the Islamic University of Balitar, Blitar, East Java, published in the East Asian Journal of Multidisciplinary Research. The study found that weaknesses in risk assessment and credit monitoring remain the main drivers of rising Non-Performing Loans (NPLs).
Banks play a critical role in the economy by channeling funds from depositors to borrowers. Credit distribution fuels investment, business expansion, and consumer spending. However, with that role comes the constant risk of borrower default.
When bad loans rise, banks face declining profitability, lower asset quality, and liquidity pressure. At a broader level, excessive NPLs can threaten financial system stability.
To understand how internal controls are applied in practice, the researchers used a qualitative case-study approach involving in-depth interviews, observations, and internal document analysis. The participants included two Account Officers, one Credit Manager, and one Internal Auditor directly involved in credit processes.
The study found that the bank generally follows the COSO internal control framework, which includes five core components: control environment, risk assessment, control activities, information and communication, and monitoring.
However, implementation remains inconsistent.
The most significant weakness lies in risk assessment. Instead of deeply evaluating borrower character and repayment capacity, the process often focuses heavily on administrative document completion.
“We still follow the SOP, but there is pressure to meet credit distribution targets,” one Account Officer explained in the study. This highlights the conflict between business growth and prudential principles.
Target pressure pushes bank staff to accelerate loan approvals, sometimes at the expense of thorough analysis. This creates vulnerabilities that may lead to future bad loans.
Limited human resources also contribute to the problem. One Account Officer may handle many clients at once, reducing the quality of both credit analysis and post-loan supervision.
The study also identifies monitoring as the weakest internal control component. Loan supervision after disbursement is often inconsistent, especially for smaller loans considered low risk.
Yet this is the stage where early warning signs of repayment difficulties could be detected.
According to Purnomo and Martanti, internal control is not merely about having procedures in place, but ensuring those procedures are implemented consistently and independently.
Their findings reveal a gap between theory and practice. In theory, internal control systems are designed to prevent risk from the beginning. In reality, business pressure, limited staff, and weak supervision reduce their effectiveness.
The study suggests banks should improve deeper risk analysis, strengthen monitoring systems, and adopt more integrated digital tools for real-time borrower evaluation.
For regulators such as the Financial Services Authority (OJK) and Bank Indonesia, the findings may serve as a basis for improving oversight of banking prudential practices.
In an increasingly competitive banking industry, the study delivers a clear message: credit growth without strong risk controls can easily turn into a growing bad loan crisis.
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