Banking Credit Risk and Efficiency: Some Countries in ASEAN

Abstract

Banking efficiency is an important strategy to increase competitiveness. The ultimate goal of improving bank performance is the ability of business groups, banks, or countries to excel in competition. Banking can increase competitiveness in various ways, including increasing efficiency. This study presents an empirical analysis of the effect of credit risk on the value of banking cost efficiency in ASEAN. Cost efficiency is measured using panel data of banks in 10 ASEAN countries, employing stochastic frontier analysis and assuming a fixed effect. The efficiency is obtained using the Panel Stochastic Frontier Analysis method. The relationship between loan risk and efficiency is assessed using a linear regression model, specifically, Feasible Generalized Least Squares. In general, banking efficiency in ASEAN exceeds 80%. Another finding from this study is a negative relationship between credit risk and banking efficiency. In this case, the risk that most significantly reduces efficiency is the risk obtained from the loan-to-asset ratio indicator. The greater the risk the bank takes, the lower the cost-efficiency value of the bank. The implications of this research include that bank managers must reduce credit risk to increase the efficiency of bank operational costs.