The lending implications of loan loss provisioning and monetary policy in Indonesia

This study investigates the heterogeneity of loan loss provisioning (LLP) and monetary policy effects on bank lending in Indonesia. The findings indicate that an increasing LLP and monetary policy interest rates lead to lower credit growth. This effect is more substantial among banks with low capital or liquidity. High LLP incentivizes banks to reduce credit lines and increase loan interest rates. The results suggest that prior high capital and liquidity may moderate the impact of high provisions and tight monetary policy on bank lending while mitigating financial stability concerns during an economic downturn. This study also discusses the policy implications of these findings.