The Effect of Credit Risk on the Financial Performance of Banking in Indonesia

Abstract

This study aims to analyze the effect of credit risk on the financial performance of banking institutions in Indonesia. The Non-Performing Loan ratio measures credit risk, while Return on Equity represents financial performance. The research employed a quantitative approach using secondary data from the Indonesian Banking Statistics published by the Financial Services Authority (Otoritas Jasa Keuangan/OJK) from August 2022 to August 2023. Data were analyzed using SPSS software through classical assumption tests and simple linear regression. The results indicate that Non-Performing Loan has a negative and significant effect on Return on Equity, with a regression coefficient of –0.373 and a determination value (R²) of 0.834. This means that 83.4% of the variation in financial performance is explained by changes in Non-Performing Loan. The findings highlight that an increase in credit risk reduces bank profitability, implying that effective credit risk management is essential to maintaining the financial stability and performance of Indonesian banks