Mandatory of expanding MSMEs loans: Measuring impact on credit risk and bank intermediation

The objective of this study is to analyze the impact of micro, small, and medium enterprises’ (MSMEs) credit, both in nominal and proportional terms, on the relative credit risk of MSMEs and the role of banking intermediaries, including the potential occurrence of credit rationing. The study utilizes annual balance panel data from 28 publicly listed banks covering the period 2013–2022. The analysis employs a fixed-effect panel regression using the generalized least squares (GLS) and the generalized method of moments (GMM) estimator. The findings of this study indicate that an increase in MSMEs credit in nominal terms does not have a negative impact on the relative credit risk of MSMEs, banking intermediation, or lead to credit rationing. However, a larger proportion of MSMEs’ loan tends to elevate the relative credit risk of MSMEs (Arifaj & Baruti, 2023; Sondakh et al., 2021), reduce the level of banking intermediation, and suggest the presence of credit rationing, wherein a higher proportion of MSMEs’ loan actually reduces non-MSMEs’ credit (corporate and household loans). Based on these findings, the study concludes that efforts to increase MSMEs’ loan, particularly in proportion to total credit, have the potential to disrupt banking stability and impede the pace of banking intermediation (Eyalsalman et al., 2024).