CREDIT DOWNTURN IN THE AFTERMATH OF INDONESIAN CRISIS 1997 REVISITED: AN APPLICATION OF ARDL BOUNDS TESTING APPROACH

English Version

I. INTRODUCTION

The existing empirical works on credit downturn suggest that the root of the declining credit disbursement in Asian countries after the crisis is still in debate (among others Ghosh and Ghosh, 1999; Agenor, Aizenman and Hoffmaister, 2000). Some argued that it was caused by credit crunch which stimulated the phenomenon of credit rationing and resulting in the inward shifting supply of credit by banks (supply side constraint). Others believed that decreasing in bank lending was stirred by dwindling demand for credit (demand side constraint) resulted from contraction in aggregate demand and output after the crisis.

As a developing economy, financing to business sectors in Indonesia has been dominated by bank credits. At this juncture, the sluggish growth of bank credit after the crisis 1997 (henceforth the crisis) was blamed as root of the belated recovery of Indonesian economy, relative to South Korea and Thailand. Despite significant improvement in macroeconomic indicators and problems in the banking industry were gradually recovered, increase in bank credits is insufficient to push the economy back to its level prior to the crisis. Banks became more risk averse and attitude toward risk in the business sector were the reason of their reluctance to lend. Concurrently, efforts by banking authority to urge the banking system met the prudential regulation, i.e., CAR 8% and NPLs 5% at the end of 2001 and legal lending limit (maximum credit allowed to one debtor), were suspected as another reason of banks» aversion to lend. This slow growth of bank credits offers an interesting background to be discussed (see Figure II.1).

The present paper extends and complements the existing studies, by evaluating the root of credit downturn after the crisis for the case of Indonesia. This paper employs recent technique of the cointegration analysis, namely the autoregressive distributed lag (henceforth ARDL) bounds


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