The lending implication of a funding for lending scheme policy during COVID-19 pandemic: The case of Indonesia Banks

We investigate the lending implication of the PMK 70, a low-cost funding for lending scheme introduced by the Indonesian Ministry of Finance in June 2020 as a response to the COVID-19 pandemic. We utilize a quasi-experimental design of difference -in-differences to compare the lending of participating state-owned banks to the non-participating banks before and after the introduction of the policy. Overall, our findings suggest that the policy encourages participating banks to lend more than the non-participating banks during the distress period. We find no evidence that the low-cost funds lead to a moral hazard of liquidity hoarding for the state-owned banks. Our findings also highlight the important role of unconventional policies in alleviating banks' risk aversion during downturns.(c) 2023 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.