Non-Performing Loans: Endogenous Constraint on the Credit–Growth Nexus

Abstract

This study explores the possibility of a lag in the transmission of credit channeling and non-performing loans to economic growth in Indonesia. The autoregressive distributed lag (ARDL) model was applied to yearly data from 2003 to 2020 and endogenous constraint (EC) was used as a dynamic indicator of credit channeling and non-performance on growth. The model shows that economic growth in Indonesia is positively and significantly affected by credit channeling in years t-1 and t-3; meanwhile, non-performing loans in the current year (year t) suppress the growth. Therefore, from the perspective of the crisis phase, the first step that the monetary and fiscal authorities need to take is to tackle the increase in non-performing loans. It was also concluded that the endogenous constraint (EC) score can be used as a leading dynamic indicator in monetary and fiscal policy during the prosperity phase but is inefficient during a crisis.