Non-Performing Loans are one of the indicators of the health of financial institution assets. This term is often abbreviated as NPL, where one of the factors causing it is that the debtor is unable to pay or repay the loan from the Financial Institution.
Usually, this happens because of the economic crisis, so that the percentage of bad loans becomes higher.
So, to make it clearer, let's immediately look at the following meanings, factors, formulas and impacts.
1. What is a Non-Performing Loan?
According to Bank Indonesia, several are included in Non-Performing Loans (NPL), namely loans of doubtful quality, substandard and non-performing.
This problem also often occurs when the debtor cannot pay the installments according to the previous agreement or agreement.
From this definition, it can be concluded that Non-Performing Loans are one of the asset health indices of a financial institution.
This can be realized in basic financial ratios which can provide an assessment of profitability, market risk, credit, capital and liquidity conditions.
In other words, NPL, aka Non-Performing Loan, is an indication of problems occurring in a related financial institution.
As a result of NPLs, the capital owned by financial institutions is reduced. If this continues, it could have a negative impact on credit in the following period.
2. Factors that Cause Non-Performing Loans to Occur
There are several factors that cause NPLs or Non-Performing Loans, namely:
2.1 Undesirable Situations Arise
Undesirable situations sometimes arise suddenly without being predicted in advance. One of them was a natural disaster which caused all of the creditor's assets to be lost.
Apart from that, the economic crisis can also be a cause of NPLs, because there is an increase in loans, but creditors find it difficult to pay them because the economy is weak.
2.2 Lack of Analysis
When the bank does not carry out proper analysis of debtors who will make loans, NPLs can arise for these financial institutions. Therefore, make sure that creditors always carry out careful and thorough analysis of debtors, so that they do not cause losses and credit jams in the future.
2.3 Collusion Occurs
This does not always happen, but collusion often occurs between financial institutions, bank employees, for example, and the debtors themselves. Where bank employees continue to provide loans, even though the results of the analysis state that the debtor is unable to pay the loan.
2.4 Character of the Debtor
The next factor causing the emergence of Non-Performing Loans (NPL) comes from the character of the debtor itself. The debtor is unable to pay the installments at maturity. Usually, this happens because of business problems, making it difficult to pay and causing the credit he has to become bad.
2.5 Other Factors
Apart from the previous factors, there are also other factors that cause the emergence of NPLs, such as changes in government policy, projects not being completed on time, the debtor's business experiencing problems and high leverage (high debt levels).
3. Formula for Calculating Non-Performing Loans
The higher the value of a financial institution's Non-Performing Loans, the lower the profits they receive.
Therefore, calculations to obtain the NPL ratio are important. The aim is so that the financial institutions concerned can avoid these credit problems.
The formula used to calculate Non Performing Loans (NPL) is:
Non Performing Loan Ratio = (Total NPL / Total Credit) x 100%
If you have finished calculating using this formula, then you can determine the NPL profile ratio using the following indices:
- Very healthy = NPL < 2%
- Healthy = 2% < NPL < 5% is considered healthy
- Fairly healthy = 5% < NPL < 8%
- Unhealthy = 8% < NPL < 12% is considered unhealthy
- Unhealthy = > 12% considered unhealthy.
To better understand the NPL formula above, here is an example question that you can understand.
Example:
In 2023, bank X will provide total credit loans worth IDR 2,000,000,000 to debtors. The total Non-Performing Loans (NPL) owned by bank X is IDR 20,000,000. So, what is the NPL level and what category does bank X fall into?
Answer:
Total NPL: IDR 20,000,000
Total credit: IDR 2,000,000,000
NPL ratio = IDR 20,000,000 / IDR 2,000,000,000 x 100%
= 1%
So, it can be seen that bank X's NPL level is 1%. This 1 percent value is below 2%, so bank X is in the very healthy category. This means that the bank is able to manage loans well.
4. Impact of Non-Performing Loans
If a financial institution has a high NPL level, it is a sign that the financial institution has failed in managing the credit provided. This will have several impacts, such as:
4.1 Liquidity
Liquidity is the first impact due to unhealthy NPL levels. Liquidity itself is the ability of a financial institution such as banking and finance companies to fulfill its cash and loan obligations so as not to experience losses.
If the level of liquidity is high, the bank has the potential to experience difficulty paying its obligations. Whether it is to safeguard customer funds, provide credit to borrowers, as well as to the bank's own employees.
This problem has a big impact on financial institutions, because if liquidity does not decrease continuously, it will make these financial institutions automatically go out of business.
4.2 Profitability
Furthermore, the impact that occurs due to Non-Performing Loans is the profitability or profit from the operations of the financial institution itself.
Financial institutions will have difficulty making a profit from their operational results every day. This is because credit loans lent to creditors are problematic or cannot be taken back.
Therefore, banks do not gain profits from lending funds to creditors. This is a sign that the bank is experiencing losses and has an unhealthy NPL level.
4.3 Solvency
Lastly, the impact caused by Non-Performing Loans (NPL) is solvency. The meaning of solvency itself is the ability of a financial institution to carry out its obligations and functions.
As a result of the large number of loans that are not paid by debtors, the capital of financial institutions is reduced. In fact, customer trust has decreased. Because, they believe that banks or finance companies are not carrying out their obligations and functions properly.
If this continues to happen, the solvency impact will increasingly cause financial institutions to suffer losses. For example, in the banking industry, banks will have difficulty getting new customers who want to save their money there.
Therefore, make sure that the banking sector is able to carry out good financial management and is always careful when analyzing potential debtors who will borrow funds from their own bank.
That's the information about Non-Performing Loans that you can find out. So that financial institutions don't experience unhealthy NPLs, make sure you as a debtor start carrying out good financial management, OK? So, the credit you have can be paid according to the specified time period.
