The Effect of COVID-19 to Credit Risk and Capital Risk of State-Owned Bank in Indonesia: A System Dynamics Model

Abstract

The global COVID-19 pandemic has greatly affected people, especially in the economic and banking sectors. The Indonesian Financial Services Authority (Otoritas Jasa Keuangan, OJK) issued a credit restructuring policy, effective from March 2020 to March 2022, to reduce credit and bank capital risk. This study proposes the bank risk scenario after the credit restructuring policy of the OJK moratorium in March 2022 and proposes the internal bank policy simulation to mitigate credit and capital risks in terms of Non-Performing Loan (NPL) and Capital Adequacy Ratio (CAR). The difficulty of this study is how to develop the risk scenario and to simulate the bank risk mitigation policy after the policy moratorium, while the COVID-19 pandemic is still ongoing and the economy is not yet normal. To that purpose, this study uses a system dynamics methodology with Powersim Studio 10© software that is able to make scenarios on the level of credit risk (NPL) and bank capital (CAR) and able to simulate internal bank policy to overcome the risk by considering the environmental and policy changes. Based on the policy simulation, it is recommended that bank can implement the restructuring policy to control the credit risk and strengthening the NPL monitoring activity in order to manage and decrease the loan impairment expenses. To increase CAR, the result shows that the combined policy consists of the NPL monitoring program, the interest rate and the operating cost management program is able to produce a significant increase in bank’s capital (CAR). The original contribution of this study is to provide new model of credit and capital risk scenario and risk mitigation simulation during the COVID-19 pandemic. The advantage of this study is that the model can be tested and implemented to other banks.