The Effect of Non-Performing Loans and Capital Adequacy Ratio on Return on Assets of Banking Institutions Listed on The Indonesia Stock Exchange (2020–2023)

Abstract

This study aims to examine the extent to which the non-performing loan ratio and the capital adequacy ratio affect the return on assets of the banking sector listed on the Indonesia Stock Exchange during the 2020–2023 period. The research employs a quantitative approach using the multiple linear regression method. The data were obtained from secondary financial statements of 22 banks over four years of observation. The results reveal that non-performing loan ratio has a negative and significant effect on the return on assets, indicating that an increase in non-performing loans tends to reduce the bank’s ability to generate profits from its assets. Meanwhile, the capital adequacy ratio shows no significant effect on the return on assets, implying that a larger amount of capital does not necessarily enhance profitability. These findings suggest that bank performance is more influenced by the effectiveness of asset management and credit quality rather than the amount of available capital, particularly during periods of crisis and economic recovery. The study is limited by the relatively short observation period and the small number of independent variables, as it focuses solely on quantitative analysis without considering qualitative aspects. Practically, the findings provide insights for bank management to strengthen credit risk control and maintain asset quality as strategic measures to sustain profitability amid economic uncertainty. Overall, this research contributes to the empirical literature on factors affecting banking financial performance in the post–COVID-19 recovery era.

Keywords

Banking Performance, Capital Adequacy Rasio, Indonesia, Non-Performing Loan, Return on Assets