The Effect of Asset Quality and Financial Performance on Non Performing Loans (NPLs) of Rural Banks in Indonesia

. The number of Rural Banks in Indonesia continued to decrease during 2015-2019, even when its assets increase positively. Credit is the primary source of income for rural banks, so most assets are placed in lending. However, growth in lending was followed by higher growth in problematic lending so that the level of Non-Performing Loans (NPLs) continued to increase and exceeded the maximum limit set by Bank Indonesia. It indicates that Rural Banks has not worked optimally in Indonesia, especially in facing the credit risks. This study aimed to analyze the effect of assets qualities consisting of total assets and earning assets quality and financial performance consisting of productivity, efficiency, and profitability on NPL over the 2015-2019 periods. This research used secondary data that is a financial report publication published by Otoritas Jasa Keuangan. Research's sample used 320 Rural Banks all over Indonesia selected by purposive sampling method. The data were analyzed with regression data panel. The results showed that total assets did not affect NPL. Earning assets quality had a positive effect on NPL, while productivity, efficiency, and profitability negatively affected NPL.