NON-PERFORMING LOANS: ENDOGENOUS CONSTRAINT ON THE CREDIT-GROWTH NEXUS

Abstract

This study explores the possibility of a lag in the transmission of credit channeling and non-performing loans to economic growth in Indonesia. The autoregressive distributed lag (ARDL) model was applied to yearly data from 2003 to 2020 and endogenous constraint (EC) was used as a dynamic indicator of credit channeling and non-performance on growth. The model shows that economic growth in Indonesia is positively and significantly affected by credit channeling in years t-1 and t-3; meanwhile, non-performing loans in the current year (year ) suppress the growth. Therefore, from the perspective of the crisis phase, the first step that the monetary and fiscal authorities need to take is to tackle the increase in non-performing loans. It was also concluded that the endogenous constraint (EC) score can be used as a leading dynamic indicator in monetary and fiscal policy during the prosperity phase but is inefficient during a crisis.