Diversification, Capital Buffer, Ownership and Credit Risk Management in Microfinance : An Investigation on Indonesian Rural Banks

We investigate the extent of credit risk management in the Indonesian rural banking industry. Specifically, we focus on the role of diversification, capital buffer, and ownership on the probability of incidence and trajectory of two credit risk proxies—loan loss reserve to non-performing loan ratio (LLR_NPL) and net non-performing loan to total loan ratio (NPL_Net). Parametric survival and logistic regression methods are applied to a balanced panel dataset of 852 rural banks from June 2010 to March 2019 (30672 bank quarter observations). We find that credit risk began to surface between 16–23 quarters. Government ownership and funding diversification positively impact credit risk management. A different nature of credit risk proxy (LLR_NPL versus NPL_Net) significantly affects the role of capital buffer, type of ownership, and credit risk trajectory