Lending Against the Tide: Coastal Credit Mismatch, Subsidence-Adjusted Bank Risk, and the Climate-Vulnerability Loan Premium in Pantura Central Java
DOI:
https://doi.org/10.47747/fmiic.v1i3.3560Abstract
The northern coast of Central Java, where land subsides between 2 and 20 centimetres per year and where bank credit reached IDR 423.5 trillion by mid-2025, provides a unique empirical laboratory for examining how the banking system prices and allocates credit in the presence of climate physical risk. We construct three diagnostic measures: the Coastal Credit Mismatch Index (CCMI) that captures sectoral under-allocation of credit to coastal-anchor sectors; the Subsidence-Adjusted Non-Performing Loan ratio (SANPL) that augments observed NPL with a physical-fragility loading; and the Climate-Vulnerability Loan Premium (CVLP) that quantifies the additional interest-rate compensation lenders would require under risk-neutral pricing. Using an unbalanced panel of 13 Pantura kabupaten over 2016 to 2021, we find that subsidence raises SANPL by approximately 4.6 basis points per centimetre-year (t-statistic equal to 3.3), with the effect compounding to approximately 55 basis points in Demak over the 6-year sample. The estimated CVLP for the highest-subsidence kabupaten reaches 135 to 270 basis points but is largely absent from the observed sectoral lending rate structure. The findings have direct implications for the asset-liability management of Indonesian regional banks, for OJK macroprudential reporting requirements, and for the design of the kafalah subsidy that underwrites KUR lending in subsidence-affected coastal areas.
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