MSME Lending, Risk, Capital, and Macroeconomic Drivers Across Bank Types in the COVID-19 Cycle

This study examines how MSME lending, MSME Loan at Risk (MSME-LAR), capital adequacy, and macroeconomic conditions influence bank profitability across ownership types in Indonesia, and how the COVID-19 crisis moderates these relationships. Using balanced quarterly panel data from 2013Q1–2025Q1 covering state-owned banks (BUMN), private national banks (BUSN), and regional development banks (BPD), the analysis employs a Fixed Effects Model (FEM) with cluster-robust standard errors and diagnostic tests for heterogeneity, multicollinearity, autocorrelation, and heteroskedasticity. The results show that MSME lending reduces profitability, and this adverse effect intensifies during the COVID-19 crisis. MSME-LAR consistently erodes returns, confirming its role as a forward-looking credit risk measure. Capital adequacy exhibits heterogeneous effects—insignificant overall but negative for BPDs, indicating overcapitalization constraints. Among macroeconomic variables, GDP growth is negatively associated with profitability, inflation modestly improves margins, and commodity prices strongly enhance returns, particularly for BUMN and BUSN. COVID-19 amplifies the risks of MSME lending and strengthens the profitability benefits of commodity price increases. This study contributes to the literature by introducing MSME-LAR as a risk metric, demonstrating ownershipspecific vulnerabilities, and conceptualizing COVID-19 as a moderating shock. Policy implications emphasize the need for countercyclical buffers, risk-sharing schemes, and differentiated regulatory approaches to balance inclusive MSME intermediation with sustainable bank profitability.