Lender response to credit risk: The case of Bank Perkreditan Rakyat in East Java, Indonesia.

摘要

The objective of this study is to investigate credit risk mitigating techniques adopted by Bank Perkreditan Rakyats (People Credit Banks) in Indonesia. The study found that BPRs in general use the basic and simple banking practices in order to minimize the administrative cost, a condition required for lending in their environment, since the amount of the loans are usually small.;The bank's screening mechanisms to solve the adverse selection problem is based mostly on borrower ability to supply collateral and their personal attribute and reputation. The latter characteristics are more prevalent in the case of non-city banks that perform character-based lending. This type of lending depends critically on the quality of the information used for assessing borrower creditworthiness. BPRs seems to lack access to the sources of sound information that, in turn, may become the other sources of the problem of the non-performing loans.;The problem of moral hazard is resolved by using both price and non-pricing risk strategies. In addition to these strategies, the simple loan monitoring system is also carried out. In cases, where the bank customers are price sensitive, the compensating balances serve as a disguise pricing strategy. In other cases, credit rationing is also implemented. To further enforce the borrowers' adherence to the credit agreement, the special clause on default in the debt covenant is also explicitly indicated to the debtors to discourage the borrowers from undertaking riskier actions. Finally establishing a good rapport between the lender and borrower is added to build a trustworthy relationship.;The size of the banks, managerial skill and lenders conservatism are contributing significant effects on banks' risk pricing policies. However, when the underlying specification in the model is changed, only bank size matters. Competition does not play an important role in BPRs pricing decision. Group-based lending is one of the non-pricing methods for risk reduction. Most of the respondent banks stated that their main reason for using group-lending scheme is to minimize risk and provide an alternative for borrower's lack of collateral. Nonetheless, many problematic banks ignore the potential used of this method. Implementation of this policy is found to be affected positively by bank profitability. Diversification of the loan portfolio is another non-pricing technique for reducing credit risk. BPR lending patterns are dominated by loans directed to trading purpose and loans intended for working capital. Loans for agricultural production are the least preferred by BPRs and considered as the riskiest.;Bank Perkreditan Rakyat's decision to choose their location of operation is significantly determined by the intensity of trading activity in the area, the deposit potential in the surrounding area and the existing banking establishment.;BPRs are adopting the unsound banking practice and ignoring prudential banking principles commonly undertaken by the banking community in East Java, by having more loans than the deposit they can obtained. The problem is either caused by banks' inability to attract more depositors as the source of loanable funds or its aggressive lending practices.