Credit Risk, Profitability, and Credit Risk Management Strategy: Evidence from Rural Banks in Central Java During PPAP and CKPN Transition

Abstract

This study examines the effect of credit risk on profitability, moderated by credit risk management strategy of Bank Perekonomian Rakyat/BPR Business Activity 2 (BPRKU 2) in Central Java during the 2021-2025 regulatory transition. Using purposive sampling, 50 OJK-registered rural banks were selected, yielding 250 panel data observations. Analysis was conducted via panel data regression with a Fixed Effect Model (FEM) and Moderated Regression Analysis (MRA). The study further analyzes two sub-periods of provisioning regulations: the Allowance for Losses on Earning Assets (PPAP/Penyisihan Penghapusan Aktiva Produktif) period 2021-2023 and the PSAK 71-based Allowance for Impairment Losses (CKPN/Cadangan Kerugian Penurunan Nilai) period 2024-2025. Variables include Non-Performing Loans (NPL) as the independent variable, Return on Assets (ROA) as the dependent variable, and Credit Risk Management Strategy (SMRK) proxied by the coverage ratio as the moderator, with BOPO, LDR, and Bank Size as controls. Results show that NPL has a significant negative effect on ROA. Notably, SMRK fails to moderate this negative impact across all models (combined, PPAP periods, and CKPN periods). This anomaly highlights a functional shift of provisioning instruments from dynamic risk protection tools to front-loaded structural expenses to comply with strict PSAK 71 regulations. Among controls, BOPO consistently exhibits a significant negative effect. LDR is significantly positive only during the PPAP period. Meanwhile, Bank Size shows a structural shift, reversing from significantly negative in the PPAP period to significantly positive in the CKPN period. Management must strengthen prudential banking principles during early credit disbursement rather than solely focusing on nominal provisioning adequacy.