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 approve the Bank’s credit plans and oversees its implementation, approves its basic credit policy and request an explanation from the Board of Directors should there be any deviations in loan disbursement from the stipulated policies.
2. The Board of Directors is responsible for the preparation of credit plans and credit policy, ensures the Bank’s compliance with prevailing credit and credit policy laws and regulations, and reports to the Board of Commissioners on matters such as the implementation of credit plans, anomalies in credit disbursement, loan portfolio quality and credit in the special mention or non-performing loan category.
3. The Chief Risk Officer, a member of BCA’s Board of Directors, is responsible for the management of credit, market, operational and other risks within the Bank’s organisation (hereinafter referred to as the Director of Compliance and Risk Management).
4. Work units that perform functions related to credit risk management (the Business Lending Development and Credit Risk Analysis Units), are risk owners responsible for the management of credit risk.
The Bank has dedicated committees assisting the Board of Directors in the lending process:
1. The Credit Policy Committee’s principal function is assisting the Board of Directors in formulating credit policies, especially those relating to the principle of prudence in lending, monitoring and evaluating the implementation of credit policies, conducting periodic reviews on the Bank’s basic credit policy (KDPB), monitoring the credit portfolio’s progress and condition, and providing suggestions and corrective measures based on the results of evaluations carried out.
2. The Credit Committee has the principal function of 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 on the specific request of the Board of Directors, as well as coordinating with the Assets and Liabilities Committee (ALCO) in terms of funding for
3. The Risk Management Committee’s main function is to develop policies, strategies and guidelines for risk management implementation, determine matters related to irregular business decisions and enhance 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
BCA formulates risk management strategies in accordance with the Bank’s overall business strategy and based on the Bank’s risk appetite and risk tolerance. Risk management strategies are designed to ensure that the Bank’s risk exposure is prudently managed in line with the credit policy, the Bank’s internal procedures, laws and regulations and other applicable provisions.
Structured risk management strategies are based on the following general principles:
• Risk management strategies should be long-term- oriented for the sustainability of the 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,
• Maintain expected capital adequacy and allocate adequate resources to support the implementation of risk management.
The risk management strategies are prepared with consideration of the following factors:
• Economic and business development and the potential impacts of the risks faced by BCA;
• The organisational 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 the risks arising from both external and internal factors;
• The composition and diversification of the Bank’s portfolio.
Credit Concentration Risk Management Policy
Portfolio management addresses credit risk by determining risk concentration limits for, among others, industrial sector exposure, foreign exchange, and certain types of loan as well as both individual and business group exposure. Along with monitoring the development of the rating database, technology, human resources and the Bank’s complexity level, as well as the market and regulations, the Bank’s portfolio management unit actively works to optimise the allocation of the Bank’s capital to achieve an acceptable risk level in line with risk appetite and risk tolerance.
Credit Risk Measurement and Control
BCA measures credit risk using a standardised method compliant with OJK Circular Letter No.42/SEOJK.03/2016 regarding Guidelines for Calculating Risk Weighted Assets.
BCA uses an internal rating as a supporting tool in the credit decision-making process.
Credit risk management is executed through the establishment of an independent rating system comprising the following:
• Evaluation of the credit administration process;
• Assessment of the accuracy in the implementation of internal risk rating and the use of other monitoring tools;
• Work units and Bank officers responsible for monitoring individual credit quality.
BCA uses early detection systems to identify possible non- performing or potential problematic loans and takes proactive steps in managing the loan portfolio in order to minimise 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 that 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.
Financial Assets Not Individually Significant and Assessed Collectively for Impairment
Financial assets that are not individually significant are those loans and receivables provided by the Bank to retail 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 Bank’s determines the impairment of financial assets that are not individually and the impairment is assessed collectively, by classifying financial assets based on similar risk characteristics.
Collective measurement is carried out statistically using the parameters of Probability of Default, Loss Given Default and 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 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 modelling, such as Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD), 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 experienced a significant decline with a history of late payment (stage 3).
At each reporting date, the entity assesses whether the credit risk on the financial instrument has increased significantly (SICR) since initial recognition. In making that assessment, the entity compares the risk of default with initial recognition and considers reasonable and supportable information available without undue cost or effort that indicates a significant increase in credit risk (SICR) since initial recognition.
Forward Looking Information
In calculating expected credit losses, the Bank takes into account the macroeconomic forecast. In addition, the Bank also determines a weighted probability for the possibility of macro scenarios. Various macroeconomic variables (MEV) are used in modelling PSAK 71 depending on the results of statistical analysis of the suitability of the MEV with historical data for modelling 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 where market prices are heading 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 the collateral needed to provide for a credit downgrade
Collateral as 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).
Meanwhile, for consumer loans such as KPR, the impact of collateral value will directly affect the credit rating of the debtor, high collateral value causes credit rating improvement.
Qualitative Disclosures regarding Securitization Exposures (SECA)
In an effort to diversify risks and maximize returns, BCA has placed a number of portfolios in the form of securitization or Asset-Backed Securities Collective Investment Contract (KIK EBA). BCA acts as an investor and invests in EBA products
with investment grade ratings and do placement in class (tranche) senior or get the first claim rights againts the entire collection of financial assets.
Standardised 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 Calculation of Risk Weighted Assets by using the Standardised Approach for Credit Risk, OJK Circular Letter No.48/SEOJK.03/2017 and OJK Circular Letter No.11/SEOJK.03/2018.
Through the Basel II standardised approach, the credit RWA is calculated based on the ratings issued by rating agencies recognised by OJK, as stipulated in OJK Circular Letter No.37/
SEOJK.03/2016 regarding Rating Agencies and Ratings Recognised by OJK.
The use of third party 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 standardised 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 for commercial bank.
Credit Risk Mitigation
The preferred type of collateral accepted to mitigate credit risk is solid collateral defined 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 is 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.
When processing credit, the main guarantors/warrant providers are analysed as a risk mitigant to the overall credit risk. Creditworthiness and security analysis 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.