MANAGEMENT BEHAVIOUR TESTING: RELATIONSHIP OF NON-PERFORMING LOAN AND OPERATIONAL EFFICIENCY RATIO IN THE INDONESIA BANKING SECTOR

• Main Author: Erlangga Ludwian, Reza
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/68265
• Institution: Institut Teknologi Bandung

The high degree of competition and the presence of foreign banks, the problem of banking efficiency and stability are extremely significant from a microeconomic standpoint, and it should be high on the agenda to downsize underperforming institutions. The efficiency of the banking sector, on the other hand, has a significant impact on intermediary costs and preserving the banking system's stability since it may have systemic effects from a macroeconomic standpoint. This paper seeks to expand on prior research on management behaviour conducted by Berger and DeYoung (1992) in the context of the Indonesian banking industry in 4 different ownership clusters by examining the relationship between the NPL ratio and bank operational efficiency, which is specifically proxied by the non-interest expense/non-interest income in the Indonesian banking industry. The authors add to the wide body of knowledge by examining non-performing loans (NPLs) and bank efficiency in banks with varied ownership structures, notably in Indonesia. To the best of the author's knowledge, this article is the first to examine the management behaviour framework in the Indonesian banking system from the perspective of operational efficiency. This research also intends to provide regulators with important information so they can identify the true difficulties facing the banking sector, which might aid Indonesia's banking development. The Indonesia Banking Statistic Reports, which were compiled on a quarterly basis between January 2010 and September 2021, served as the source for all datasets. The first two hypotheses—poor management and bad luck—were the main subjects of OLS estimation in the granger causality method. The results show that each bank cluster in the Indonesian Banking System reacted differently in terms of the relationship between problematic loans and operational effectiveness and that they were sensitive to the model's inclusion of delays. In sum, each of the four alternative bank cluster models identified the bad management, skimping, and bad luck hypotheses, respectively. This study provides a more complete picture of the state of the banking sector in Indonesia after the regulatory transitional periods and may offer useful guidance to the banking regulator in regulating bank behaviour management to reduce credit risk and boost bank productivity. These findings could give regulators new perspectives on how to approach various bank clusters in order to develop precise policies that are pertinent to and consistent with the behaviour of the time. This study offers a number of suggestions for more study. In order to identify characteristics that affect banks' management behaviour in various economic conditions, authors may advise comparing these behaviours in the Indonesian banking sector to those in other developing and developed countries. The second recommendation from the authors is to use variable proxies to this issue to check if the results are compatible with this research, such as by utilizing the stochastic frontier as a proxy for efficiency. It is feasible to give more insights in the context of dynamic analysis by using various statistical methods, such as Vector Auto Regression (VAR). Another suggestion for future research is a multi-step study that uses aggregate and panel data utilizing bank level data as a proxy to evaluate deeper about especially the skimping behaviour as well as moral hazard behaviour in the Indonesian banking sector. Keywords: Management Behaviour; Bad Management; Bad Luck; Non-Performing Loan; Operational Efficiency; Indonesian Banking.