The implementation of Corporate Governance (CG) in the banking world has increasingly developed in the last few decades. The world of credit, which is the pulse of the banking industry, is also growing due to the development of the "hedonism" lifestyle and the rapid globalization. Responding to these developments, each bank has now begun to change the mindset in implementing CG. Currently every bank has superior jargon in implementing a complete CG such as the ASEAN Corporate Governance Scorecard and Whistleblowing System.
The Bank does not only take preventive actions against bad loans at the beginning of the transaction through CREDIT MONITORING, but also takes curative actions during the credit period through Credit Monitoring. Credit Monitoring is not only a focus for banks, other companies also have a Credit Monitoring system to control their corporate debt. Sometimes a company still has assets that still bear the debt that needs to be monitored so as not to become a loss in the future. Regulations (OJK, 2017) also require the Risk Management Committee to take part in Credit Monitoring (OJK, 2017).
Banks as the main movers of credit certainly have a special division in conducting Credit Monitoring. The division is tasked specifically to carry out monitoring actions on all bank creditors and take special preventive measures against creditors who have an indication of bad credit. As one element in the bank structure, Credit Monitoring cannot be released from CG. The choice of preventive, supervisory and non-performing loan enforcement methods must be based on the corporate governance system. So that the quality of CG of an organization / banking also gives a role to the quality of the credit monitoring itself.
The problem of Non performing Loan (NPL) is a big challenge for the banking world because since the banking restructuring program began, the ratio of Non performing Loan (NPL) has been difficult to achieve the ideal number. If banks are able to reduce the ratio of Non performing Loan (NPL), the potential benefits to be gained will be even greater because banks will save money that will be needed to back up Non performing Loan (NPL) losses.
The object of research in this study is PT Bank Mandiri (Persero) Tbk. The high NPL at PT Bank Mandiri (Persero) Tbk, can have a large impact on the sustainability of the company. According to the FSA regulation No. 42 / POJK.03 / 2017 concerning bad loans, the highest limit of NPLs at banks is 5%. If the limit is exceeded, the bank must reduce the amount of credit granted. The reduction in the amount of credit certainly has an impact on the decline in bank income from the credit sector. In addition, the high NPL also increases the risk for the bank's capital availability. Therefore, steps must be taken to reduce the risk of PT Bank Mandiri (Persero) Tbk's NPL, going forward.
Some previous studies such as Ko, Lee and Anandarajan (2001) state that the type of corporate governance can influence the type of corporate supervision over assets that are strengthened by research from Mili and Abid (2016). Tarchouna's research (2017) states that corporate governance can influence decision making on risky investments. Credit is a way for banks to invest capital that is owned despite high risk. Saada (2017) states that good corporate governance of a bank can facilitate banks in conducting supervision of bad loans, which strengthens research from Tarchouna (2017). Piatti and Cincinelli's research (2019) states that the weakness of a bank's credit supervision is the main problem in the high bad loans at the bank.
Search results through the study of previous research libraries also have not found a comprehensive study involving all of these variables. Comprehensive research will provide more accurate analysis results because it considers that NPL can be influenced by several factors, namely CG and Credit Monitoring. This study also revealed that Technology Monitoring provides a moderating role that increases the influence of CG and Credit Monitoring variables on NPL. No previous research has been found that tested the moderation of Technology Monitoring on the influence of CG and Credit Monitoring on NPLs as well as being novelty in this study.
- Literature Review and Hypotheses Development
This research uses Financial Intermediation Monitoring Theory. The Financial Intermediation Monitoring Theory (Diamond, 1984) states that optimal oversight by stakeholders in company positions can minimize the risk of investment. Diamond also added that delegated monitoring conducted by the company is one way to reduce monitoring cost without sacrificing the effectiveness of supervision.
Corporate governance according to The Indonesian Corporate Governance Manual (OJK, 2017) issued by the Financial Services Authority is a system of relationships within companies that are governed by structures and processes. Corporate governance refers to the way companies are governed and for what purpose. It identifies who has power and accountability, and who makes decisions. This, in essence, is a tool that allows management and the board to deal with company matters more effectively. Corporate governance ensures that business policies have the right decision-making and control processes so that the interests of all stakeholders (shareholders, employees, suppliers, customers and society) are balanced. Governance at the company level covers the process in which company objectives are set and implemented in context social environment, regulations and markets. This relates to practices and procedures to ensure that the company is run in such a way as to achieve its objectives, while ensuring that stakeholders can have confidence that their trust in the company has been carried out properly.
The biggest asset of a bank is credit. 80 percent of assets from banks are credit. Credit needs to be monitored because it requires a long process, so monitoring and coaching is needed. Some risks include: rising interest rates, inflation, changes in the value of a currency against foreign currencies. Non-performing loans do not happen suddenly. Monitoring is a tool to monitor credit to prevent irregularities. Monitoring is needed because the magnitude of the impact of credit quality (collectibility) on the continuity of bank business, can prevent problems from becoming larger, and because every process of asset conversion can be exposed to potential risks. This risk exists in every form and type of activity, including in the process of bank branch activities. It's just that the intensity of the risk is different in each form and type of activity. These risks must be anticipated so that the negative impact on credit can be minimized. There will not be a sudden bad credit if the stages in the crediting process are followed properly. If a bank has been monitoring well, it means that the bank has run an early warning system, where early detection is carried out to find out indications that are potential risks for bank credit. Indications of deviation can be detected through several types of monitoring. The more efficient type of monitoring depends a lot on the use of manpower, time, cost, and risk faced because banks will always consider this. These indications are deviations from the terms of lending, which is essentially the provisions of the monetary authority, bank provisions, prerequisites / conditions, and the results of negotiations between the bank and the customer.
Non performing loan according to Rottke and Gentgen (2008), is a permanent phenomenon that is present in neCredit Monitoringa banks and other lending institutions. Increasing credit poses significant problems for neCredit Monitoringa banks and the emergence of market Non Performing Loan (NPL) is a temporary phenomenon. In this study, the analysis of the relationship between cost efficiency and NPL is ambivalent. The higher the NPL-volume the lower the cost of efficiency. However, it can also cause an increase in bad loans. According to Ozili (2019), NPL is important because it reflects the credit quality of the bank's portfolio, and in the collection of regulations reflects the credit quality of the bank's portfolio in the country. Understand policies that affect the level of risk and no financial risk is not responsible for financial risk.
- Research methodology
This research is a quantitative research. The data in this study are a combination of primary data obtained through questionnaires and also secondary data obtained from bank credit portfolios. This research was conducted at Bank Mandiri in the Jawa Tengah Province. Research data were collected from Bank Mandiri branch offices. The sampling technique used in this study is Judgment Sampling where the sample is chosen based on certain criteria. The population in this study were all 7 areas of Bank Mandiri in the Jawa Tengah Region. The criteria used are micro branch offices (KCM) in 3 areas with the largest loan portfolio in Jawa Tengah.
Table 1 shows the size of the loan portfolio per area in Bank Mandiri in Jawa Tengah Region. From this table, it can be seen that the Semarang area loan portfolio is the largest contributor to the portfolio with a total portfolio of Rp 2,467 trillion, followed by the Solo area with a portfolio of Rp 1,884 trillion and the Kudus area with Rp 1,784 trillion. Seeing from this explanation, the Semarang, Solo and Kudus areas are sampled in this study. Data will be analyzed using SEM technique. The use of SEM method is based on the reason SEM has an advantage in confirming the relationship theory between variables contained in the structural model and or testing the relationship between variables whose theoretical basis is weak or even does not yet exist.