The lending implication of a funding for lending scheme policy during COVID-19 pandemic: The case of Indonesia Banks

Abstract

We investigate the lending implication of the PMK 70, a low-cost funding for lending scheme introduced by the Indonesian Ministry of Finance in June 2020 as a response to the COVID-19 pandemic. We utilize a quasi-experimental design of difference-in-differences to compare the lending of participating state-owned banks to the non-participating banks before and after the introduction of the policy. Overall, our findings suggest that the policy encourages participating banks to lend more than the non-participating banks during the distress period. We find no evidence that the low-cost funds lead to a moral hazard of liquidity hoarding for the state-owned banks. Our findings also highlight the important role of unconventional policies in alleviating banks’ risk aversion during downturns.