A. Disclosure of Credit Risk Exposure and Implementation of Credit Risk Management

EFFECTIVENESS OF BANK RISK MANAGEMENT SYSTEMS

III. A. Disclosure of Credit Risk Exposure and Implementation of Credit Risk Management

Organization of Credit Risk Management

BCA has established a structured credit risk management process in order to support sound lending principles with strong internal control.

1.

The Board of Commissioners approves the Bank’s

credit plans and oversees their realization;

approves the Bank’s Basic Credit Policy and seeks explanations from the Board of Directors should there be any deviations in loan disbursement from the established policy.

2.

The Board of Directors is responsible for the

preparation of credit plans and the formulation of

credit policies; ensures the Bank’s compliance with

relevant to the field of credit and credit policy;

and reports to the Board of Commissioners on matters such as the realization of the credit plan, irregularities in loan disbursement, the loan portfolio quality and credit in the special mention or in the non-performing loan category.

3.

Chief Risk Officer, a member of the BCA Board of

Directors, is responsible for the management of credit, market, operational, and others risks faced by the Bank (the Compliance and Risk Management Director)

4.

Work Units that perform functions related to credit risk management (the Business Lending

Development Unit and the Credit Risk Analysis Unit), are risk owners and are responsible for the management of credit risk.

The Bank has dedicated committees that assist the Board of Directors in the lending process, as follows:

1.

Credit Policy Committee has a principal function

of assisting the Board of Directors in formulating credit policies, especially in regard to the principle of prudence in lending, monitoring and evaluating the implementation of credit policies, conducting periodic credit policy reviews on Basic Credit Policy of Bank monitoring the progress and condition of the credit portfolio as well as providing advice and suggesting solutions for improvements based on the results of the Committee’s evaluations.

2.

Credit Committee has the principal function of

providing guidance for credit analysis, providing decisions or recommendations on drafts of credit decisions associated with major debtors, specific industries or on special requests from the Board of Directors as well as coordinating with the Asset and Liability Committee (ALCO) in relation to the availability of funding for expected credit drawdowns and corporate lending rate adjustments.

3.

Risk Management Committee has the main

function of 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

Risk Management Strategy for Activities With Significant Credit Risk Exposure

BCA formulates risk management strategies in accordance with the Bank’s overall business strategy based on the Bank’s risk appetite and risk tolerance. Risk management strategies are designed to ensure that the Bank’s risk exposure is carefully 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 strategy should be long term oriented for the sustainability of the business by considering economic conditions and cycles;

• Comprehensive risk management strategy must be able to control and manage the risks of the Bank and its subsidiaries;

• Expected capital adequacy should be maintained and adequate resources need to be allocated to support the implementation of risk management.

Risk management strategies are prepared in consideration of the following factors:

• The economic and business development and the impact that may occur as a result of the risks faced by BCA;

• The organization structure of BCA, including the adequacy of human resources and supporting infrastructure;

• The financial condition of BCA, including the ability to generate earnings and the ability to manage the risks arising from both external and internal factors;

• The composition and diversification of the BCA’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

lending, and certain types of loans as well as both

individual and business group exposures. Along with

monitoring the development of the ratings database,

technology, human resources, the Bank’s complexity

method based on guidelines in accordance with OJK Circular Letter No. 42/SEOJK.03/2016 regarding Guidelines for Calculation of Risk Weighted Assets for Credit Risks by using the Standardized Approach that requires all banks to use a standardized approach to calculate its risk weighted assets for credit risk. For internal purposes, the Bank uses an internal ratings scorecard as a tool to assist the credit decision process.

Credit risk management is executed through the establishment of an independent rating system for effective implementation of credit risk management processes, comprising:

• Evaluation of the credit administration process;

• Assessment of accuracy in the implementation of internal risk ratings and the use of other monitoring tools;

• Performance effectiveness of work units and Bank officers which are responsible for monitoring individual credit quality.

BCA exercises early detection systems to identify possible non-performing or potentially problematic loans and takes proactive steps to manage the loan portfolio in order to minimize the impact of non- performing loans on the overall portfolio.

Loans and Receivables that are Overdue and Impaired

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 the initial recognition of the financial asset.

Approach Used for the Formulation of Allowances for Impairment

Allowance for impairment losses is an allowance established if the carrying amount of the financial asset after impairment is less than the initial carrying amount.

The Allowance for Impairment losses is adjusted on the basis of impairment under the implementation of Statement of Financial Accounting Standards (SFAS) No. 50/55.

Impairment evaluation is performed individually and collectively. The approach to calculating impairment on an individual loan is by comparing the contract value of

flows from the loan using an Effective Interest Rate (EIR) and the amortized cost of the loan at the time the impairment event occurs. Collective impairment is calculated statistically using the following statistical parameters:

a. Probability of Default (PD) is the debtor’s probability of failure to meet obligations as measured by Migration Analysis and Roll Rates reviews;

b. Loss Given Default (LGD) is the level of losses resulting from the debtor’s failure to meet obligations. Calculating a reasonable LGD percentage requires an analysis of historical data.

Standardized Approach to the Application 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 Standardized Approach for credit risk.

Through the Basel II standardized approach, the credit RWA is calculated based on the ratings issued by rating agencies recognized by OJK as stipulated in OJK Circular Letter No.37/SEOJK.03/2016 regarding Rating Agencies and Ratings recognized by OJK.

The use of external 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 standardized Approach used to calculate credit risk of capital adequacy ratio for any exposures that caused credit risk as a result of counterparty failure (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 regulation such as Bank Indonesia

Regulation No. 8/13/PBI/2006 related to Legal Lending

Limits.

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 loan processing. 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 analyzed 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.

Credit mitigation techniques are focused on strong collateral coverage. To further mitigate bank-wide potential credit risks, the Bank’s loan portfolio is well diversified with regard to loan category and industrial and economic sectors.

III.B. Disclosure of Market Risk Exposure and