EXPLORING THE IMPACT OF LOAN RESTRUCTURING IN INDONESIAN BANKING

Wahyoe Soedarmono, Iman Gunadi (), Fiskara Indawan () and Carla Sheila Wulandari
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Iman Gunadi: Bank Indonesia
Fiskara Indawan: Bank Indonesia

No WP/06/2021, Working Papers from Bank Indonesia

Abstract: This paper investigates the impact of loan restructuring on risk and performance in Indonesian banking. We find that higher restructured loans increase non-performing loans. Concomittantly, higher restructured loans are associated with higher capital ratio and lower insolvency risk. In this regard, higher capital ratio is sufficient to offset an increase in credit risk, which in turn enhances bank solvency. A deeper analysis suggests that such findings are driven by banks with lower capitalization and private-owned banks. For banks with higher capitalization and government-owned banks, higher restructured loans may deteriorate bank solvency. Moreover, the role of loan restructuring in strengthening financial stability is more pronounced during economic downturns in general. Although loan restructuring matters for financial stability regardless of the degree of economic growth, the effectiveness of loan restructuring policy is conditional.

Keywords: Bank loan restructuring; risk; capital ratio; performance; Indonesia (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2021
New Economics Papers: this item is included in nep-fdg, nep-rmg and nep-sea
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http://publication-bi.org/repec/idn/wpaper/WP062021.pdf First version, 2021 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:idn:wpaper:wp062021

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