CREDIT RISK MODELS FOR FIVE MAJOR SECTORS IN INDONESIA

Abstract

This paper analyze Nonperforming Loan ratio to total credit (NPL), as a proxy for credit risk, for five major economic sectors by utilizing panel data of 117 commercial banks in Indonesia over period 2000Q1 to 2016Q3. Our empirical analysis shows that real economic growth is the main driver that is negatively correlated with credit risks in all sectors. The inverse relation is also found in commodity and housing price. Commodity price inflation affects NPL in manufacturing industry and trade sectors, meanwhile housing price inflation influences NPL in manufacturing industry, trade, and construction sectors. In addition, decreased in policy rate will decline credit risk in commodity, trade, and other sectors, meanwhile nominal exchange rate only affects credit risks in other sector. Our assessment shows that credit risks in commodity and other sectors are more sensitive to real economic growth than those on manufacturing industry and trade sectors. Real economic growth elasticities to credit risk for commodity and other sectors are almost twice higher than for manufacturing industry and trade sectors. Thus, during economic contraction phase, NPL in commodity and other sectors will increase higher than NPL in manufacturing industry and trade sectors.