Political Connections, Credit Risk, and Financial Performance: State-Owned versus Private Banks

Abstract

This study aims to examine the impact of political
connections and credit risk (Non-Performing Loan/NPL) on
financial performance (Return on Assets/ROA), and to analyze
the comparative differences of their impacts between
conventional state-owned and private banks listed on the
Indonesia Stock Exchange for the 2020–2025 period. This
quantitative study employs panel data regression utilizing the
Common Effect Model (CEM) approach on a sample of 37
conventional banks (yielding 222 observations) selected through
purposive sampling. Empirical findings reveal that political
connections partially have no significant effect on bank
profitability. Conversely, credit risk (NPL) demonstrates a
negative and significant impact on financial performance.
Furthermore, the ownership interaction test confirms no
significant structural difference regarding the impact of these
variables between state-owned and private banking groups. The
results imply that strict regulatory oversight successfully
neutralizes both the potential agency costs and the economic
privileges associated with political connections. Additionally, the
provisioning burden caused by surging NPLs acts as a universal
destructive determinant on bank profitability, overriding the
institution's ownership status or dual mandates.

Keywords: Political Connection, Credit Risk, Financial
Performance, Profitability, State-Owned Banks, Private Banks.