The effect of loan-loss provision, non-performing loans and third-party fund on capital adequacy ratio

Mulyanto Nugroho,Donny Arif,Abdul Halik

doi:10.5267/j.ac.2021.1.013

Abstract

This research was conducted in connection with the effective enactment of International Financial Accounting Standard IFRS 2020 to improve the concept of hedging accounting as well as basic measurement and classification of financial instruments. IFRS carries the concept of Expected loss backup which begins to acknowledge losses if there is a potential failure to pay even though it has not really happened, allowing the bank to form a larger loan-loss provision. The loan-loss provision is formed based on the number of failed pays in credits indicated by the ratio of Non-Performing Loans (NPLs). Fund distribution can be regulated by the Third-party Fund (TPF). The increasing number of loan-loss provisions and NPLs are feared to affect capital conditions for the bank. Therefore, the study aims to determine the partial and simultaneous influence of the loan-loss provision, Non-Performing Loans (NPLs), and third-party Fund (TPF) against the bank's capital adequacy ratio (CAR). The samples in this study are central government-owned banks, namely Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia, and Bank Tabungan Negara period from 2011 to 2018. Data taken is a data time series of the quarterly financial statements published by the respective online website of the bank. The analysis used is a multiple linear regression analysis using SPSS Tools version 21 and Microsoft Excel. The results showed that a partial loan-loss provision had no significant effect on the bank's capital adequacy ratio, while the Non-Performing Loans (NPLs) and the Third-party Fund (TPF) were partially influential of the bank's capital adequacy ratio. Simultaneously the three independent variables have a significant effect on the dependent variable capital adequacy ratio (CAR).

Highlights

In the era of globalization, it is marked by the increasing number of people who use bank services in economic activities and for the purpose of saving money
This study aims to determine the effect of the independent variable of Allowance for Impairment Losses, Non-Performing Loan Ratio (NPL), and the amount of Third Party Funds (TPF) either partially or simultaneously on the dependent variable Capital Adequacy Ratio (CAR)
1. t-test results, the loan-loss provisions variable shows that the t-value is -1.217 smaller than t table of 1.979124

Summary

Introduction

In the era of globalization, it is marked by the increasing number of people who use bank services in economic activities and for the purpose of saving money. One primary function of banks is to provide methods of payment to facilitate transactions. In buying and selling activities, the public uses bank services to facilitate the payment process if transactions are done remotely, both transactions between regions and transactions between countries. The bank prepares various products to meet customers' financial needs (Nugroho et al, 2020). Given its tremendous potential in the financial sector and customers’ key role in its success, many researchers have investigated customer adoption of mobile banking and payment services (Choi et al, 2020). UU No. of 1998 concerning Banking, a bank is a business entity that seeks to collect funds from the public in the form of deposits and channel them back to the community through credit to improve the living standards of the Indonesian people

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Conclusion