Bank specific Factors Affecting Non performing Loans in Developing Countries: Case Study of Indonesia
In recent decades, financial crises in various countries have often been preceded by the rise in non performing loans (NPLs) in the banks' asset portfolios. The increase in NPLs is proven to have adverse impact on the banking sector so that understanding the determinant of NPLs is immensely crucial to ensure the efficiency and soundness of the overall economy. This study aims to shed light on bank specific factors that affect loan default problems in developing countries whose banking sectors play a major role in the overall economy. This study analyzes panel data sets of 36 commercial banks listed in the Indonesian Stock Exchange during the period 2008 2015. Applying fixedeffects panel regression model reveals that Indonesian banks' profitability and credit growth negatively influence the number of NPLs. Moreover, banks with higher profitability are proven to have lower NPLs because they can afford adequate credit management practices. Likewise, banks with higher credit growth evidently have lower NPLs in the sense that they demonstrate more specialized lending activity and thus have better credit management systems. These findings imply that, in order to lower loan defaults that can deteriorate banks' asset quality, banks should maintain their level of profitability and increase, rather than decrease, their credit supply to debtors.