LOAN QUALITY AND BANK’S PROFITABILITY IN INDONESIA

Abstract

The purpose of this study is to analyze the impact of loan quality towards bank’s profitability in Indonesia. This study is important because loan quality is crucial for banking industry due to generate profitability to the bank. This study has 1 (one) main research question, which is: ‘What is the impact of Loan Quality towards Net Interest Margin?’ This study is a quantitative study using panel data generalized least squares (GLS) regression in STATA M-64; and using secondary data that generated from Indonesian 16 (sixteen) largest commercial banks annual report during 2006-2015 and using convenience sampling and multilevel method. Furthermore, this study focuses to analyze the impact of Impaired Loans to Gross Loans; Loan Loss Reserve to Gross Loans; Net Loans to Deposit and Short Term Funding; Net Loans to Total Deposits & Borrowings; as loan quality’s proxies together with Cost to Income Ratio as management quality proxy towards Net Interest Margin as bank’s profitability proxy. The findings show that Impaired Loans to Gross Loans; Loan Loss Reserve to Gross Loans have a positive significant impact towards NIM. On the other hand, Net Loans to Deposit and Short Term Funding; and Net Loans to Total Deposits & Borrowings have a negative significant impact towards NIM. Surprisingly, even though Cost to Income Ratio has a negative impact towards NIM but insignificant. Therefore, this study contributes evidence that loan quality has significant impact towards NIM.