Moral Hazard Versus Adverse Selection On The People’s Business Credit Program In Indonesia

Abstract

This paper discusses the behavior of providing bank credit to SMEs during the people’s business credit (KUR) program in Indonesia. Since it was launched in 2007, the average NPL for these loans has increased. This indicates the existence of moral hazard behavior in lending by banks. To prove this indication, this paper implements a threshold regression model. Data covers 38 participating banks, which were observed during Q1-2008 to Q2-2021. The results of data analysis show that moral hazard behavior is indicated when NPL below or equal to 5.87%, on the contrary, experienced adverse selection. Specifically, moral hazard behavior is dominant in the case of investment credit and local government- owned banks. In working capital loans and others, this behavior also occurs, but not as in the case of investment loans. Moral hazard and adverse selection behavior were not detected at all in stateowned banks, while in private banks only occurred at a low level. At the end of the analysis, we also consider the shock effects of the global financial crisis (2008), European crisis (2009), and the Covid-19 pandemic (2020-2021) on the threshold regression model, but the results are negative, thus strengthening our previous findings. In general, the factors that significantly determine the risk of non-performing loans in the people’s business credit program are the increase in credit growth, market share, deposit insurance interest rates, and economic growth as well as a decrease in the benchmark interest rate. However, the specifics are different, both in each type of credit and the type of participating bank.