Public Trust Crisis Due to Non-Performing Loans and the Relevance of the Prudential Principle in Credit Agreements

The stability of financial institutions depends not only on sound credit risk management but also on maintaining public trust. A surge in non-performing loans (NPLs) undermines depositor confidence, damages the reputation of banks, and may trigger broader systemic risk. This article investigates how non-performing loans contribute to a public trust crisis, and analyses the role of the prudential principle—embodied in credit agreements and banking regulation—in rebuilding or preserving trust. Drawing on empirical studies and legal frameworks in Indonesia and beyond, the paper examines both bank-specific and macroprudential determinants of NPLs, such as bank efficiency, capital adequacy, interest rate policy, and regulatory supervision (Prawira & Wiryono, 2022; Gustriani et al., 2022). It also scrutinizes how prudential banking principles—particularly the ‘5C’s of credit (character, capacity, capital, collateral, conditions)—are incorporated in credit agreements and regulatory norms (Camelia, Romizah, Ukhrowi & Syamsi, 2022; Kusumastuti, 2022). The findings suggest that while prudential principles are conceptually well-embedded in laws and banking practices, in many cases weak enforcement, regulatory gaps, complex legal procedures, and adverse economic conditions weaken their effectiveness. The conclusion argues for stronger legal safeguards, more rigorous regulatory oversight, simplified procedures for NPL recovery, transparency in banking operations, and reforms to ensure that prudential norms are not just formalities but functional tools in credit granting. The paper recommends policy actions for regulators, banks, and legislators to restore public confidence and reduce the incidence of problematic credit.