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Exploring The Impact Of Loan Restructuring In Indonesian Banking

Author

Listed:
  • Wahyoe Soedarmono
  • Iman Gunadi

    (Bank Indonesia)

  • Fiskara Indawan

    (Bank Indonesia)

  • Carla Sheila Wulandari
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.

Suggested Citation

  • Wahyoe Soedarmono & Iman Gunadi & Fiskara Indawan & Carla Sheila Wulandari, 2021. "Exploring The Impact Of Loan Restructuring In Indonesian Banking," Working Papers WP/06/2021, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp062021
    as

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    File URL: http://publication-bi.org/repec/idn/wpaper/WP062021.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank loan restructuring; risk; capital ratio; performance; Indonesia;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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