An Analysis Of The Impact Of Financial Distress On Non-Performing Loans And Its Implications For Bank Profitability In Indonesia

Apriani Simatupang; Adler Haymans Manurung; Bahtiar Usman

doi:10.63922/ijebir.v4i03.1859

Apriani Simatupang Pelita Harapan, University,
Adler Haymans Manurung Bhayangkara, University
Bahtiar Usman Trisakti, University

DOI: https://doi.org/10.63922/ijebir.v4i03.1859

Keywords: financial distress, non-performing loans, return on assets, banking, profitability

Abstract

This study examines the impact of financial distress on non-performing loans (NPLs) and its implications for bank profitability in Indonesia, measured by return on assets (ROA). Using a quantitative causal-comparative approach with secondary data from 37 banks listed on the Indonesia Stock Exchange (IDX) from 2010 to 2023, this study employs mediation analysis to determine whether NPLs mediate the relationship between financial distress and profitability. The findings show that financial distress significantly increases NPLs and negatively affects ROA. Moreover, NPLs partially mediate the relationship between financial distress and profitability, indicating that deteriorating asset quality serves as a transmission mechanism. These results highlight the importance of proactive credit risk management to mitigate the adverse effects of financial distress and preserve financial performance. The study provides theoretical contributions to signaling theory and practical implications for bank management, regulators, and investors in formulating risk-based strategies to ensure long-term financial sustainability.

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