THE USE OF US' INDEX THEORY TO ENHANCE QUALITY OF LOAN WITHIN BANKING INDUSTRY AND FINANCIAL INSTITUTIONS CASE STUDY: BANK ABC

Abstract

ABSTRACT
The economic crisis has been decreased the performance of Banking Industry in Indonesia
as reflected in the decreasing of Loan Growth and the increasing of Non-Performing Loans (NPLs)
ratio since 2015. Increasing NPLs was followed by increasing cost of loan and decreasing ROA of
Banks and others financial institutions therefore Bank should be innovate to enhance its loan
quality.This study was conducted to determine influence of leverage towards profitability ratios of
68 companies which are debtors of Bank ABC in Performing Loan quality within two groups of US'
Index value and tested by Correlation and Linear Regression Analysis. Based on the research’s
outputs, it was concluded that in group of US’ Index < 1 leverage has been influencing negatively
to its profitability while on another group, with US’ Index > 1, leverage has been influencing
positively. Those conclusions were reinforced by the decline trend of US 'Index value on financial
performances of 21 debtors were included in the category of watch-list debtors as well as proven
in the study case of debtor which is now included into the category of non-performing loans. This
study has shown that US’ Index theory could be implemented in all stages of loan process, such as
to analysis the repayment capacity of applicants at the front end, as loan monitoring system at
the middle end, and as a guidance in loan restructuring and collecting repayment at the back end
stage. Therefore, this study suggests the use of US’ Index theory as a credit risk control strategy
to reducing NPLs in Banks and Financial Institutions in order to enhance its loan quality and
generate sustainable profit.
Key words: NPLs, Cost of Loan, US’ Index, Capital Structure, Linear Regression.