A Dynamic Model of Non-Performing Loans of the Largest Micro-Lender in Indonesia
A Dynamic Model of Non-Performing Loans of the Largest Micro-Lender in Indonesia

Summary/Abstract: This study is aimed at empirically exploring the short- and long-term relationships between lending interest rate, total deposits, total loans, and non-performing loans of the largest micro-lender in Indonesia. It also attempts to investigate both bivariate and multivariate causalities among these variables. For this purposes, an Autoregressive Distributed Lag (ARDL) and a Vector Error Correction Model (VECM) approaches are adopted using the quarterly data over the 2003-2015 period. The non￾performing loans were positively affected by their total loans and total deposits, but they were negatively impacted by the lending interest rate. As for the dynamic causalities, the total loans and lending interest rate bidirectionally Granger caused the non-performing loans, but the non-performing loans were unidirectionally Granger caused by the total deposits. These findings imply that to enhance the capital structure of the small- and medium- enterprises in the country through the distribution of small-scale loans by the largest micro-financing banks in Indonesia, the bank should design a proper credit policy with a lower lending interest in order to have lower level of non-performing loans.

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