Financial performance and financial distress

The mediating role of credit risk in indonesian people's economy banks (2020–2024)

Abstract

This study examines the effects of capital adequacy (Capital Adequacy Ratio/CAR), liquidity policy (Loan-to-Deposit Ratio/LDR), and operational efficiency (Operating Expenses to Operating Income/BOPO) on financial distress, with credit risk measured by Non-Performing Loans (NPL) as an intervening variable. Financial distress is proxied using the Modified Altman Z''-Score. Grounded in Agency Theory and Risk Management Theory, the study employs a quantitative approach using secondary data from Indonesian People's Economic Banks (BPRs) published by the Financial Services Authority (OJK) during 2020–2024. Using purposive sampling, the study analyzes 5,975 bank-year observations from 1,206 BPRs through panel data regression and mediation analysis. The findings show that CAR has a positive and significant effect on the Modified Altman Z''-Score, indicating stronger financial resilience, while LDR has no significant effect. BOPO negatively affects the Modified Altman Z''-Score, suggesting that lower operational efficiency increases the likelihood of financial distress. CAR does not significantly influence NPL, whereas LDR and BOPO positively affect credit risk. NPL significantly influences financial distress and partially mediates the relationships between financial performance indicators and financial distress. These findings highlight the importance of maintaining adequate capital, improving operational efficiency, and strengthening credit risk management to enhance the financial stability of BPRs. The study contributes to the banking risk management literature by explaining the mechanism through which financial performance affects financial distress and provides practical implications for bank managers and regulators in strengthening the resilience of Indonesia's rural banking sector.