The Effect of Restructuring the Quality of Earning Assets and Profitability on the Minimum Capital in Rural Banks

Abstract

This study aims to examine the effect of Non Performing Loans (NPL), Return On Assets (ROA) and Return On Equity (ROE) on the Capital Adequacy Ratio (CAR). As an intermediary institution, rural banks has an obligation to comply with and follow the rules of the Financial Services Authority(OJK). OJK issued the Minimum Capital Adequacy Requirement (MCAR) regulation, which was originally required to be 8% to 12% of Risk Weighted Assets (RWA) with a deadline of the end of December 2019. The emergence of the Covid-19 pandemic has put pressure on rural banks performance due to the increasing threat of bad loans. The OJK issued a national economic stimulus regulation that contained restructuring of the quality of productive assets so that bad loans could be suppressed. By using a sample of 57 rural banks with assets of 3 billion to 35 billion in 2020, the effect is tested using multiple regression. The results of the study simultaneously that NPL, ROA and ROE have an effect on CAR. Partially NPL has a positive effect on CAR, ROA has a negative effect on CAR, ROE has a significant positive effect on CAR.