Non-performing loans, moral hazard and lending behaviour of Indonesian Banks

This research aims to analyze the effects of non-performing loans ratio to lending behaviour on listed conventional banks in Indonesia in the period of 2006-2015. By applying the Threshold Regression method from Hansen (1999) and using the most recent non-performing loans ratio as the threshold variable, researcher found that the moral hazard problem is exist when the NPLs ratio exceed 5.29 per cent. We figure out whether there is different behavior in lending between bank which has NPLs ratio above the threshold and below the threshold. And as result, we found the difference since there is threshold effect from our fixed effect panel regression. This difference is not yet shows that the moral hazard is exist in banking system of Indonesia. However, the signs from the independent variables explain that there is moral hazard. Bank with NPLs above the 5.29 per cent has loan growth which increase the NPLs, whereas bank with NPLs below 5.29 per cent has loan growth which decrease the NPLs. The troubled bank behave differently from the rules, with their bad condition, they are adapting riskier lending strategy instead of prudent lending strategies. The determinants of the non-performing loans ratio in Indonesia are loan growth rate (LGR), last period loan growth rate (1.LGR), equity to total asset ratio (ER) and bank size (Size).