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Vol 40 No 2 (2025): May

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Submitted
May 11, 2023
Accepted
Nov 13, 2024
Published
May 28, 2025
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Balancing Caution and Expansion: The Non-Performing Loans Threshold for the Credit-Growth Nexus

https://doi.org/10.22146/jieb.v40i2.8017
Idah Zuhroh
Economics Department, Universitas Muhammadiyah, Malang, Indonesia
Mochamad Rofik
mochamadrofik81@gmail.com
Economics Department, Faculty of Economics and Business, Universitas Muhammadiyah Malang, Indonesia.

Corresponding Author(s) : Mochamad Rofik

mochamadrofik81@gmail.com

Journal of Indonesian Economy and Business, Vol 40 No 2 (2025): May

Abstract

Introduction/Main Objectives: This research explores how non-performing loans (NPLs) affect economic growth while assuming that the economy can sustain a certain ratio of NPLs without disruption. Background Problems: Studies employing the threshold approach have not explicitly defined the upper limit of NPLs that supports economic growth. Novelty: This study adds to the existing literature by examining the non-linear relationship between NPLs and economic growth, grounded in two key assumptions: 1) the complete elimination of NPLs is unrealistic, and 2) a threshold level of NPLs exists. Research Methods: Based on this assumption, the study constructs a non-linear model with an inverted U-shape pattern, applying annual data from 33 provinces in Indonesia during 2010–2021 and employing dynamic panel data regression with the GMM estimator. Finding/Results: The results reveal that NPLs will have a negative impact on growth when the NPL ratio exceeds 5.8% in total credit and 2.4% for household credit. However, no inverted U-shaped pattern is observed for working capital and investment credit. In addition, bank credit in total, as well as working capital credit and household credit show a significant positive coefficient on growth, while investment credit has an insignificant negative coefficient. We also introduce the concept of NPLs-growth risk, categorizing it as risk-free, low-risk, moderate-risk, and high-risk based on the area under the curve. The findings indicate that the NPLs-growth risk in Indonesia is generally at a low level. Conclusion: Ensuring that NPLs remain within a safe threshold is essential for sustaining economic growth and avoiding financial instability.

Keywords

Bank credit NPLs growth instability threshold
Zuhroh, I., & Rofik, M. (2025). Balancing Caution and Expansion: The Non-Performing Loans Threshold for the Credit-Growth Nexus. Journal of Indonesian Economy and Business, 40(2), 296 -. https://doi.org/10.22146/jieb.v40i2.8017
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Author Biographies

Idah Zuhroh, Economics Department, Universitas Muhammadiyah, Malang, Indonesia

Idah Zuhroh is a Full Professor of Economics in the Department of Economics, Faculty of Economics and Business, Universitas Muhammadiyah Malang. Her research focuses on finance and banking stability, encompassing both conventional and Islamic financial systems

Mochamad Rofik, Economics Department, Faculty of Economics and Business, Universitas Muhammadiyah Malang, Indonesia.

Mochamad Rofik earned his bachelor's degree in Mathematics Education with a minor in Computer Science, followed by a master's degree in the same field from Universitas Muhammadiyah Malang. He is currently pursuing a doctoral degree in Economics at Universitas Brawijaya, with a research focus on financial instability.

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