Assessment of Banking Conditions on Financial Distress

During the Period of COVID-19 in Indonesia

SETIYO PURWANTO1, DIDIN HIKMAH PERKASA1, FERRYAL ABADI2

Abstract: This study was conducted to analyze the effect of liquidity ratios (LDR), profitability (ROA), and

leverage (CAR) on the financial difficulties of banking companies listed on the Indonesia Stock Exchange

difficulties. Credit risk as a moderating variable can only strengthen the influence of the liquidity ratio and

profitability ratio. Meanwhile, the leverage ratio cannot be moderated by credit risk. In the pre-pandemic period

of 2016-2019, it showed that the ratio of liquidity, profitability, and leverage could not be moderated by credit

risk. The findings in this study explain that banking conditions are not in financial difficulty during the

pandemic, but profits for companies are low. This anomaly is caused by over-liquidity from credit that is not

widely distributed to the business sector.

Key-Words: Financial Distress, Liquidity, Profitability, Leverage, Credit Risk.

Received: May 29, 2022. Revised: December 20, 2022. Accepted: January 21, 2023. Published: February 17, 2023.

indirectly. Banking also has a very important role as

described in Article 4 of Law no. 10 of 1998

concerning Banking, which aims to support the

implementation of national development in the

context of increasing equity, economic growth, and

national stability in the direction of increasing the

number of people. Thus, banking organizations are

obliged to realize socio-economic welfare. This

shows that banks have a significant role in society

and the economy, [1]. The dominant contribution

countries in the world, there has been a highly

significant change in the global economic order and

has an impact on the downturn in the economic

sector. The COVID-19 outbreak that has emerged in

China since 2019, was found in its first case in

Indonesia in early March 2020. The government has

taken several new strategic policies, especially in

the economic sector. The economic downturn

caused by the policy of limiting large-scale

activities in Indonesia and the "Lock-Down" in

experienced by several banks and non-bank

financial institutions in Indonesia and not a few that

could not survive so they must go out of business.

Consequently, it is necessary to take precautions in

helping investors measure and develop the

company's finances for now and after time.

Numerous predictive models that are feasible to

prevent FD conditions from occurring continued to

be implemented by researchers in anticipating the

risk of bankruptcy. Elicited from the prior, one of

for banks, [4]. The credit creation program is an

activity to generate the main income for banks.

Kargi also delineated those non-performing loans

were the prominent factor affecting FD. If the ratio

of bad loans continues to increase, it will cause

liquidity problems and even lead to bankruptcy. The

how the condition of banking performance is

compared to conditions before the pandemic from

2016-2019. Because in 2018, the Deposit Insurance

Corporation (LPS) recorded that 89 banks had been

liquidated. These banks have been operating since

2005 until the first semester of 2018. Then in 2019

LSP has also closed 9 more banks, bringing the

number of banks that have been liquidated to 101

banks. Bankruptcy is a condition that describes a

company experiencing a cash shortage so that it is

adequacy, profitability, liquidity known in a

conceptual framework called the CAMELS method

which stands for Capital (C), Asset Quality (A),

Management (M), Earning (E), Liability or

Liquidity. (L), and Sensitivity to Market Risk (S) [8],

[11], [15], [16]. Several factors that scope of the

research have a strong potential to avoid FD

conditions include capital adequacy which is

represented in CAR, the level of profit/profitability

is represented in ROA and liquidity is represented in

FD. It becomes a research gap that needs to be re-

examined whether other variables cause the

inconsistency of these findings.

2 Literature Review

2.1 Financial Distress

FD is an inability condition of a company to meet

the financial obligations to creditors, [17], [18].

depending on the situation, such as bankruptcy,

unclosed bonds, unpaid dividends, and priority

shares, [19]. Bank sectors are responsible to take on

the role of the driving force of the economy so that

it will not have a negative impact during economic

difficulties. However, a bank that is in financial

healthy company, while those with a Z score < 1.81

classified as a potential bankrupt company.

Furthermore, the score between 1.81 up to 2.99 are

bad loans or defaults on distributed loans, [22].

CAR can also cultivate trust between depositors and

regulators to support financing and increase the

ability to cover the risk of loss, [23], [12], [24].

Based on the explanation, the hypothesis could be

formulated as:

H1: CAR has a positive effect on FD.

2.3 Links between ROA and FD

ROA is employed to measure the company's

LDR measures the credit ratio distributed by the

third party. The higher level of loans, the lower ratio

of bank liquidity, [11]. If the management could not

plan, the company will suffer Financial Distress

(FD) conditions due to the short-term debt return

failure, [31]. Selling assets and other investments

are the steps that should be taken in avoiding

bankruptcy. This study is also supported and stated

by the earlier study by [29], [30]. The investment

4 Research Variables

commercial banks in Indonesia before pademic

period is 20.06 percent. Then it increased during the

pandemic to 23.19 percent. Bank Indonesia

Regulation Number 15 of 2013 concerning the

minimum capital adequacy requirement for

commercial banks is 8 percent. It means that the

minimum capital adequacy ratio has been fulfilled.

The average ROA value of 2.29 percent before

pandemic means that the profitability of banks was

low, and it’s getting lower during pandemic until 1.5

the companies are still healhty. The test results for

the credit risk variable as moderation showed a

value of 2.4 percent and decreased to 2.2 percent

during the pandemic. The normality test can be seen

in Table 3.

Table 3. Normality Test results

Asymp sig. value. in the third table was gained

0.200 higher than 0.05. It means that the residual

value in this study is assumed normal distribution.

Overall, the VIF value of CAR, ROA, LDR, and CR

variables is under 10, and the significance value of

each independent variable is > 0.05.

Table 4. Heteroscedasticity test results

Source: Secondary data testing results from SPSS

Program

Multiple regression analysis testing results are as

follows:

Table 5 delineates the t value for CAR during the

pandemic of 41.012 with a value of sig. 0.000

indicates that more capital will avoid FD conditions,

this result is in line with, [36]. This Capital

[29], [31], [30], [38]. LDR with a t-count value of

233.108 and sig. 0.000 indicates that the loans

disbursed are still healthy. This is in keeping with

research [30] that stated that the effectiveness ratio

in distributing funds in the form of credit must be

kept positive. So, the test results shown in table 5

explain that the CAR, ROA, and LDR variables

have a significant effect on FD, so this analysis

answers hypotheses H1, H2, and H3. The t value of

the CR variable was 1.702 and sig. 0.095 indicates

pandemic show that it can strengthen the effect of

to assess the level of soundness and liquidity. The

higher the LDR ratio, meaning that the bank will

have difficulty meeting its short-term obligations,

such as sudden withdrawals by customers of their

strengthen the effect of LDR on FD, so H5 is

accepted. But before the pandemic CR was not able

to moderate ROA. In contrast to the CR variable in

moderating CAR during the pandemic and before

the pandemic, it shows that CR is not able to

strengthen the effect of CAR on FD, so H6 is

rejected.

Table 6. Coefficient Result of Determination

Testing

Table 6 explains that, the effect of CAR, ROA and

5 Conclusions and Suggestions

this study, it can be seen that banking liquidity both

during the pandemic was higher than before, but it

was still good.

Realization of credit disbursement must be

maintained in balance, so that banks can maintain

their liquidity. Prudent measures in making the

During the COVID-19 pandemic, CR is considered

to be able to strengthen financial ratios to avoid

financial difficulties. Where the results of this study

indicate that the liquidity ratio (LDR) and

profitability ratio (ROA) can be strengthened by

credit risk (CR), while the capital adequacy ratio

(CAR) does not need to be strengthened by CR.

This is because every bank must always maintain its

capital adequacy ratio as determined by the

government. However, before the pandemic CR did

maintaining healthy financial ratios, so that

bankruptcy does not occur.

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