Academic journal article European Research Studies

Analysis of the Macroeconomic Impact towards the NPL National Banking in Indonesia: The Study of Macro-Economic Shock Using Vector Autoregression Models

Academic journal article European Research Studies

Analysis of the Macroeconomic Impact towards the NPL National Banking in Indonesia: The Study of Macro-Economic Shock Using Vector Autoregression Models

Article excerpt

1. Introduction

The study of the macroeconomic impact of the NPL has been done by researchers in various countries. In particular, studies on this topic have been done in Indonesia. Indonesia's economy, the credit is retained as the primary source of revenue. Banks have a must in taking the responsibility and the risks that may result from failure of the Credit. The quality of non-performing loans is usually reflected in the ratio of Non-Performing Loan (NPL). Islam and Nishiyama (2016) explains the lower the NPL ratio, the lower the level of problem loans. The low non-performing loan means the better the condition of the bank. Non-Performing Loans is one indicator in assessing the performance of the functions of the bank, where the bank is functioning as an intermediary institution. The high level of NPL shows the health of low bank because a lot going on non-performing loans in the bank's activities. By knowing the percentage of non-performing loans, which occurs in a bank, then the public and the Central Bank (Bank Indonesia) may take a wise step in addressing and facing the bank operational.

NPL developments very closely related to macroeconomic developments. This relationship influence one another and interdependent. Interdependent relationship occurs between sectors, between financial markets, between the banking industry and among global financial markets. Domestic interdependence is known to produce domestic business cycle fluctuations originating from a particular sector surprises. Some authors such as Long and Plosser (1983) says that the impact of spillovers from the financial sector to the economy is the key to understanding the recent global crisis (Stock and Watson, 2012; Ciccarelli et al., 2012a). This study states that macroeconomic factors deemed plays an important role in the banking crisis. More specifically, this study suggests that the impact of deteriorating economic conditions, in which the low or negative growth, with high unemployment rates, high interest rates and high inflation, will open up greater opportunities for the banking crisis.

There are lots of feedbacks about the causes of the financial crisis, with consideration given by experts. This significant increase in NPLs of commercial banks may pose a risk to the financial sector and the economy of Indonesia. Every year banks in Indonesia among institutions deposits grew more than 76% and total loans grew about 75%. Indonesia's economic development greatly impact on investment decisions and consumption of population growth, and economic development. For this reason, the prevention of banking problems has become a major destination for policy makers in Indonesia. Thus, a full understanding of how macroeconomic impacted on NPL is very important.

The relationship between the macroeconomic environment and credit quality has often researched in the literature on business cycles and the stability of the bank. Most banks in Indonesia still rely on credit as a major income to finance its operations. Like other developing countries, a source of financing business in Indonesia is still dominated by bank lending which is expected to drive economic growth. Lending is the primary activity of most banks making a profit, but the greatest risk in the bank is also sourced from loans. Linkage use PVAR methods for their interdependency between the bank's internal variables and external variables dynamically. Explanation of the relationship between variables derived from a variety of reference as follows.

From the aspect of internal, Altunbas (2000) found results that Net Interest Margin (NIM) positive effect on the NPL. Hughes and Mester (1993) and Girardone et al. (2004) found that there is a positive relationship between NIM and non- performing loans. Likewise, Misra and Dahl (2010) found that LDR positive effect on the NPL. Another factor that bank's assets, the research Misra and Dahl (2010) suggests that the negative effect on NPL assets. …

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