Basis for Management Policy on Capital Structure
III. A. Disclosure of Credit Risk Exposure and Implementation of Credit Risk Management
Organization of Credit Risk Management
BCA has developed a structured credit risk management process to support strong credit principles with strong internal controls:
1. The Board of Commissioners, responsible for approving the Bank’s credit plans and overseeing its implementation, approving the Bank’s Credit Basic Policy, and requesting an explanation from the Board of Directors should there be any deviations in loan disbursement from the stipulated policies.
Commissioners on matters such as the implementation of credit plans, irregularities in loan disbursement, loan portfolio quality, and credit in the special mention or in the non-performing loan category.
3. Chief Risk Officer, is a BCA director responsible for the management of credit, market, operational, and other risks within the Bank’s organization, which is referred as Compliance and Risk Management Director. The role includes:
• Guiding, supervising, and ensuring the implementation of credit policy, strategy, authority, and credit risk management framework. This includes setting the risk limit by taking into consideration the risk appetite and risk tolerance according to the Bank’s condition.
• Ensuring the implementation of credit risk management is effective, amongst other through monitoring the development and the problems of Bank’s business activities related to credit risk and monitoring the credit risk of subsidiaries in the framework of integrated risk management.
4. Work units that perform functions related to credit risk management
The units related to credit risk management are as follows:
• Business unit performing credit disbursement activities
• Credit risk analysis unit conducting credit worthiness analysis
• Credit recovery unit handling bad debt issues.
• The Risk Management Work Unit independently responsible for identifying, measuring, monitoring, and controlling the credit risk, such as regularly providing input on the formulation of credit policy, developing and reviewing risk management methodology, monitoring and reporting credit risk development (including limits) and so on, to Senior Management, Compliance and Risk Management Director, and/or other Directors as necessary.
The Bank has dedicated committees assisting the Board of Directors in the lending process:
1. Credit Policy Committee
The main function is assisting the Board of Directors in formulating credit policies, especially those relating to the prudential principle in lending, monitoring, and evaluating the implementation of credit policies, conducting periodic reviews of the Bank’s Credit Basic Policy (KDPB), monitoring the credit portfolio’s progress and condition, and providing suggestions and corrective measures based on the results of evaluations.
2. Credit Committee
The main function is providing guidance should a more in-depth and comprehensive credit analysis need to be performed, suggesting decisions or recommendations on the draft of credit decisions related to key debtors, specific industries or at the specific request of the Board of Directors, as well as coordinating with the Assets and Liabilities Committee (ALCO) in terms of funding for credit and adjustment of corporate lending rates.
3. Risk Management Committee
The main function is developing policies, strategies, and guidelines for risk management implementation, determining matters related to irregular business decisions, and enhancing the implementation of risk management based on evaluation of the effectiveness of the risk management process and system.
Risk Management Strategies for Activities with Significant Credit Risk Exposures
Risk management strategies are formulated in accordance with the overall business strategy and based on risk appetite and risk tolerance. Risk management strategies are designed to ensure that BCA’s risk exposure is prudently managed in line with its credit policy, BCA’s internal procedures, laws and regulations, and other applicable provisions.
BCA has designed a structured risk management strategy based on the following general principles:
• Risk management strategies should be long-term and oriented for the sustainability of BCA’s business by considering economic conditions and cycles
• A comprehensive risk management strategy must be able to control and manage the risks of BCA and its subsidiaries
• Maintaining expected capital adequacy and allocating adequate resources to support the implementation of risk management.
The factors considered in designing risk management strategies are as follows:
• Economic and business development and the potential impacts of risks faced by BCA
• The organizational structure of BCA, including the adequacy of human resources and supporting infrastructure
• The financial condition of BCA, including its ability to generate earnings and the ability to manage risks arising from both external and internal factors
• The composition and diversification of BCA’s portfolio.
Credit Concentration Risk Management Policy Portfolio management addresses credit concentration risk by determining limits for, amongst others, the industrial sector, foreign exchanges, and certain types of loans, as well as both individual and business group exposures. Along with the development of a rating database, technology, human
resources, the Bank’s complexity level, and the market and regulations, the Bank’s portfolio management unit actively works to optimize the allocation of the Bank’s capital to achieve an acceptable level in line with risk appetite and risk tolerance.
Credit Risk Measurement and Control
BCA measures credit risk using a standardized method that is compliant with OJK Circular Letter No. 42/SEOJK.03/2016 regarding Guidelines for Calculating Risk Weighted Assets Using a Standardized Approach. The regulation specifies that all banks must use RWA calculation for credit risk using a Standardized Approach.
For internal needs, the Bank uses an internal rating as a supporting tool in the credit decision-making process. Credit risk management is executed by establishing an independent internal credit review for an effective credit risk management process, covering:
• Evaluation of the credit administration process
• Assessment of the accuracy in the implementation of internal risk rating and the use of other monitoring tools
• Effectiveness of work units and Bank officers responsible for monitoring individual credit quality.
The Bank uses an early detection system to identify non- performing or potential non-performing loans to ensure it can take proactive steps in managing the loan portfolio in order to minimize the impact of non-performing loans on the overall portfolio.
Overdue and Impaired Receivables
Past due loans and receivables are defined as any loan or receivable that is more than 90 days overdue for payment for either principal and/or interest. Impaired loans and receivables are those financial assets of significant individual value that have objective evidence of impairment occurring after initial recognition of the financial asset.
Individually Impaired Financial Assets
An individually impaired financial asset is a financial asset that is individually significant and bears objective evidence that an individual’s impairment has occurred after the initial claim of the financial asset.
In accordance with the Bank’s internal policy, loans determined individually significant are those granted to debtors in the corporate and commercial segments.
Individual measurements are made by looking at the difference between all contractual cash flows due to the entity in accordance with the contract, and all cash flows that the entity expects to receive, i.e. all cash shortages, discounted at the effective interest rate.
segment debtors, namely Small and Medium Enterprise (SME) credit debtors, consumer financing loans (including joint financing loans), mortgage loans, motor vehicle credit, and credit cards.
The Group determines the impairment of financial assets that are not individually significant, and where the impairment is assessed collectively, by classifying financial assets based on similar risk characteristics. Collective measurement is carried out statistically using the parameters of PD (Probability of Default), LGD (Loss Given Default), and EAD (Exposure at Default).
Measurement of Expected Credit Loss
Starting 1 January 2020, the Bank’s calculation of reserves refers to PSAK 71, which introduces the expected credit loss method for measuring losses due to impairment of financial instruments.
If, at the reporting date, credit risk on a financial instrument has not increased significantly since initial recognition, the entity shall measure the allowance for losses for that financial instrument at the amount of 12 (twelve) months expected loss. An entity shall measure the allowance for losses on a financial instrument at the amount of expected credit losses over its lifetime if the credit risk on that financial instrument has increased significantly since initial recognition.
The Bank has developed risk parameter modeling, such as PD (Probability of Default), LGD (Loss Given Default), and EAD (Exposure at Default), which are used as components for calculating expected credit losses.
Staging Criteria
PSAK 71 requires entities to classify Financial Assets into three stages of impairment (stage 1, stage 2, and stage 3) by determining whether there is a significant increase in credit risk.
The Bank measures the allowance for losses as 12 months expected credit losses for financial assets with low credit risk at the reporting date (stage 1), lifelong credit losses for financial assets with a significant increase in credit risk (stage 2) and financial assets that experience a significant decline with a history of late payment (stage 3).
At each reporting date, the Bank assesses whether the credit risk on the financial instrument has increased significantly (SICR) since initial recognition. In making that assessment, the Bank compares the risk of default with initial recognition and considers reasonable and supportable information available without undue cost or effort that indicates a significant
scenarios. Various macroeconomic variables (MEV) are used in modeling PSAK 71 depending on the results of statistical analysis of the suitability of the MEV with historical data for modeling impairment. The calculation of the expected credit loss and the macroeconomic forecast (MEV) is reviewed by the Bank periodically.
Policies Related to Wrong Way Risk Exposure
To anticipate wrong way risk exposures due to market prices progressing in an adverse direction, BCA adds a capital charge for the weighted exposure of the Credit Valuation Adjustment (CVA risk weighted assets) in accordance with SEOJK No.42/SEOJK.03/2016.
The Impact on the Value of Provided Collateral for A Credit Downgrade
Collateral as a credit guarantee is differentiated between productive credit and consumer credit. For productive loans such as SME, Commercial and Corporate, the collateral impact (type, value and/or quality) will affect the credit rating in terms of the exposure risk factor (not the customer risk factor), so that the better the collateral can reduce the risk of exposure (the rating exposure risk factor has improved).
For consumer loans such as KPR, the impact of collateral value will directly affect the credit rating of the debtor. Hence, the higher collateral value, the better credit rating improvement will be.
Qualitative Disclosures regarding Securitization Exposures (SECA)
To diversify risks and maximize returns, BCA has placed several portfolios in the form of securitization or Asset- Backed Securities Collective Investment Contracts (KIK EBA).
BCA acts as an investor and invests in EBA products with investment grade ratings and conducts placement in class (tranche) senior to receive the first claim rights against the entire collection of financial assets.
Standardized Approach to the Implementation of Credit Risk Measurement
In the calculation of Risk Weighted Assets (RWA) for credit risk, the Bank refers to OJK Circular Letter No.42/
SEOJK.03/2016 regarding Guidelines for the Calculation of Risk Weighted Assets by using the Standardized Approach for Credit Risk, OJK Circular Letter No.48/SEOJK.03/2017 and OJK Circular Letter No.11/SEOJK.03/2018.
RWA for Credit Risk is calculated through the Basel II standardized approach, based on ratings issued by rating agencies recognized by OJK, as stipulated in OJK Circular Letter No.37/ SEOJK.03/2016 regarding Rating Agencies and
The use of ratings in the calculation of RWA credit risk is only for claims on Governments of Other Countries, Public Sector Entities, Multilateral Development Banks and particular International Institutions, Banks, and Corporates.
Counterparty credit risk arises from Over the Counter (OTC) derivative transactions and repo/reserve repo transactions, both on the trading book and the banking book. The standardized approach is used to calculate credit risk of capital adequacy ratio for any exposures that cause counterparty credit risk.
Determination of credit limits related to counterparty credit risks can be adjusted according to the needs of the counterparty, the Bank’s risk appetite, and any other applicable regulations, such as POJK No.32/POJK.03/2018 and No.38/POJK.03/2019 regarding Maximum Lending Limits and Large Fund Provisions for Commercial Banks.
Credit Risk Mitigation
The preferred type of collateral accepted to mitigate credit risk is solid collateral deemed as cash or land and buildings.
These types of collateral have relatively high liquidity value and/or can be legally attached so that the Bank is able to liquidate collateral immediately if the debtor’s/debtor group’s loan becomes delinquent.
Collateral assessment for loans is performed by an independent appraiser. In remote areas where no
independent appraiser is available, the appraisal will be conducted by internal staff who are not involved in the processing of the loan. To monitor the physical collateral pledged to BCA by the debtor, site visits are conducted periodically to review the status of the collateral.
The main guarantors/warrant providers are analyzed when processing credit and creditworthiness is determined by applying the “Four Eyes” principle, where credit decisions are determined by two independent parties, the Business Development Unit and the Credit Risk Analysis Unit.
The credit mitigation technique focuses on primary collateral.
In addition, to mitigate possible credit risks, BCA’s loan portfolio is well diversified, both in credit category and by industry/economic sector.