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Bank Loan Loss Provisioning And Procyclicality Revisited: Evidence From Indonesia

Author

Listed:
  • Wahyoe Soedarmono

    (Sampoerna University)

  • Iman Gunadi

    (Bank Indonesia)

  • Sudiro Pambudi

    (Bank Indonesia)

  • Ade Dwi Aryani

    (Bank Indonesia)

Abstract

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.

Suggested Citation

  • Wahyoe Soedarmono & Iman Gunadi & Sudiro Pambudi & Ade Dwi Aryani, 2022. "Bank Loan Loss Provisioning And Procyclicality Revisited: Evidence From Indonesia," Working Papers WP/02/2022, Bank Indonesia.
  • Handle: RePEc:idn:wpaper:wp022022
    as

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    References listed on IDEAS

    as
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    6. Peterson K. Ozili & Erick Outa, 2017. "Bank loan loss provisions research: A review," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(3), pages 144-163, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    expected-loan loss model (E-LLM); loan growth; loan loss provision; procyclicality;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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