Bank Loan Loss Provisioning And Procyclicality Revisited: Evidence From Indonesia

In this paper, we investigate whether discretionary and non-discretionary provisions affect bank loan growth in Indonesia. Our empirical results show that only discretionary provisions negatively affect bank loan growth. Our closer investigations document that the procyclicality of discretionary provisions is more pronounced for small banks. For large banks, higher discretionary provisions increase loan growth. Moreover, these findings are consistent regardless of bank loan types based on utilization (i.e., working capital loans, investment loans and consumption loans) or borrower size (i.e., small and medium enterprise /SME loans, and non-SME loans). Eventually, we advocate that the implementation of a dynamic provisioning system using the expected-loan loss model (E-LLM) is more essential in large banks to mitigate procyclicality, because the E-LLM tends to increase discretionary provisions and discretionary provisions are countercyclical for large banks.