Third-Party Funds and Credit Risk Exposure: A Quantitative Assessment of Risk Adjustment in Indonesian Rural Banks

Abstract

This study examines the relationship between Third-Party Funds (DPK) and credit risk exposure, proxied by Non-Performing Loans (NPL), in Indonesian Rural Banks (Bank Perkreditan Rakyat, BPR). Using a quantitative approach, the study employs monthly time-series data covering January 2019 to January 2022, obtained from the Statistik Perbankan Indonesia published by the Financial Services Authority. A linear regression model is applied to assess whether changes in third-party funds are associated with variations in credit risk. Given the time-series nature of the data, the estimation results are evaluated using both ordinary least squares and Newey–West standard errors to address potential autocorrelation. The findings indicate that although third-party funds exhibit a positive coefficient with respect to non-performing loans, the relationship is not statistically significant. This suggests that increases in third-party funds do not necessarily translate into higher credit risk exposure in rural banks. The results imply that factors beyond funding growth, including credit management practices and post-pandemic restructuring policies, may play a more important role in shaping credit risk dynamics