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Variables in the model and hypotheses
Impact of minimum CAR
According to the study by Afriyie and Akotey
(2013), the authors affirmed that rural banks
with higher CAR could absorb more credit risks
whenever they appeared. Several studies have
found a negative relationship between CAR and
NPL. For example, Sinkey and Greenawalt (1991)
showed that banks with adequate CAR had a
low NPL ratio. In the study of Shrives and Dahl
(1992) at U.S. commercial banks, they confirmed
that asset quality was negatively associated with
increased CAR. CAR is taken from Annual Report
of Commercial Banks.
Hypothesis 1 (H1): CAR does not have a negative
impact on NPL.
Impact of bank size
Salas and Saurina (2002) found a negative
relationship between bank size and loan
inefficiency, and argued that the larger the scale
of the bank was, the more likely it was that banks
would have more diversified credit opportunities.
This meant that the larger the scale was, the worse
the bad debt was. This finding is similar to the
empirical evidence reported by Hu et al. (2004).
The study of Alexandri and Santoso (2015) in
the article “Bad Debt: The Impact of Internal and
External Factors (Evidence in Indonesia)” stated
that bank size had a negative relationship with
NPL and was not statistically significant.
Bank size = Natural logarithm of the bank’s total
assets
Hypothesis 2 (H2): Bank size does not have a negative
impact on NPL.
Effectiveness of bank performance (ROA and ROE)
Alexandri and Santoso (2015) demonstrated in
their study that the ROA for the NPL was positive,
i.e. the relationship between GDP and NPL was
the same. This variable was statistically significant
with a 95% confidence level.
However, studies conducted by Rahman et al.
(2017); Anjom and Karim (2016) had an opposite
pattern. Their results showed that the relationship
between ROA and NPLwas reversed. In addition,
Anjom and Karim (2016) also introduced their
model of ROE, and the results showed that ROE
and NPL had a negative relationship.
ROA = Net income / Average Total Asset.
ROE = Net income / Shareholder’s Equity.
Hypothesis3_1 (H3_1): ROA and NPL is not
negatively correlated.
Hypothesis3_2 (H3_2): ROE and NPL is not
negatively correlated.
Impact of Loan to deposit ratio
The ratio of loans to deposits (LDRs) shows the
ability of debtors to pay on loans. In other words,
credit to customers can offset the bank’s obligations
immediately to meet the needs of depositors who
want to withdraw the money used by the bank
to provide credit. Lending rates for deposits are
an indicator of the vulnerability of a bank. Most
researchers agreed that bank safety limits on
loans are about 80%. Therefore, better banking
management in the performance of intermediary
functions can increase the bank’s interest income
(Kunt and Huizinga, 1999).
A study conducted by Jameel (2014) mentioned
the impact of loan-to-deposit rate on NPL in the
Pakistani banking system for 11 years (from 2000
to 2010). The research model had a 95.54% adjusted
R-Squared and a regression coefficient between
LDR and NPLR was negative, which meant that
the LDR was negatively correlated with NPLR.
LDR = (Total loans/Total deposits) * 100%
This high ratio implies two things: first, the bank
lends more; second is that the bank generates more
income. The problem here is that if the customer
cannot pay off the loan, banks are responsible for
paying the deposit to their customers. Hence, the
rate is too high that the bank is at high credit risk.
In contrast, a very lowpercentage means that banks
are at low risk, but at the same time the bank does
not use effective assets to generate income.
Hypothesis 4 (H4): LDR does not have a correlation
with NPL.
Impact of provision ratio
Research model of Radivojevic and Jovovic
(2017) showed a statistically significant relationship
between loan loss provision and NPL which means
that banks had high provision due to the fact that
they expected that customers would not be able
to pay their loans on time. In other words, high
provisions are not used to represent the financial
strength of banks. Provision ratio is taken from the
financial reports of commercial banks.
Hypothesis 5 (H5): Provision ratio does not impact
NPL.
Impact of Liquidity ratio
