Non-Performing Loans and Return on Assets: Evidence from Indonesian Rural Banks

Abstract

This study aims to analyze the relationship between credit risk and profitability in Indonesian rural banks (Bank Perkreditan Rakyat or BPR). Credit risk is represented by the ratio of Non-Performing Loans (NPL), while profitability is measured using Return on Assets (ROA). The study adopts a quantitative approach utilizing monthly time-series data from January 2019 to January 2022, sourced from the Indonesian Banking Statistics published by the Financial Services Authority (Otoritas Jasa Keuangan – OJK). Empirical analysis is conducted through simple linear regression to examine the relationship between NPL and ROA. Considering the time-series nature of the data, regression coefficient standard errors are corrected using the Newey–West method to address potential autocorrelation. The results show that NPL has a negative relationship with ROA, indicating that an increase in credit risk tends to be followed by a decline in BPR profitability. However, this relationship is not statistically significant after autocorrelation correction. These findings suggest that credit risk is not the sole factor affecting the profitability of BPRs and highlight the importance of considering other variables in explaining bank financial performance. This study provides conservative empirical evidence regarding the relationship between credit risk and profitability in small-scale banking institutions in Indonesia