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 $ ] &
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
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matters such as the realization of the credit plan, irregularities in loan disbursements, the loan portfolio quality and credit in the special mention or in the non-performing loan category.
[` *{, a member of the BCA Board of Directors, is responsible for the management of credit, market, operational, and other risks faced by the Bank (the Compliance and Risk Management Director). The Compliance and Risk Management Director signs off on credit settlement (write off’s '# '%% % assessment of the feasibility or suitability of credit applications considering the Bank’s overall risk appetite based on its level of risk.
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 the 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, monitoring the progress and condition of the credit portfolio and for 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,
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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 implementation of an effective risk management process and system.
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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 levels. Risk management strategies are designed to ensure that the Bank’s risk exposure is carefully managed in line with 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, and
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adequate resources will be allocated to support risk management.
Risk management strategies are prepared with consideration of the following factors:
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possible impact on the Bank in consideration of the risks faced by the Bank.
- The organization structure of BCA, including the adequacy of human resources and supporting infrastructure.
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the ability to generate earnings and the ability to manage the risks arising from both external and internal factors.
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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 loan facilities 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 level, as well as 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 risk level in line with the Bank’s risk appetite and risk tolerance parameters.
Credit Risk Measurement and Control
The Bank measures credit risk using the standardized method in accordance with OJK Circular Letter No. 42/
+:/\ ~Z D ' ! of Risk Weighted Assets for Credit Risks by using the Standardized Approach’ that requires all banks to use 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 with the credit decision process.
Credit risk management is executed through the establishment of an independent rating system for the effective implementation of credit risk management processes, comprising:
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- Assessment of accuracy in the implementation of internal risk ratings and the use of other
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- Performance effectiveness of work units and Bank '# ' % $ 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 ( $#
or receivable that is more than 90 days overdue for payment of either principal and/or interest. Impaired $ # ' # $ $ $ |$
evidence of impairment occurring after the initial '# ~
Approach Used for the Formulation of Allowances for Impairment
In anticipating possible impairment arising from the " # >
Allowances for Impairment Losses. 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 compares the contract value ' ? '% ? impaired value of a loan based on an estimate of '% :''$
: %]' at the time an 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
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n the calculation of Risk Weighted Assets (RWA) for credit risk, the Bank refers to OJK Circular Letter No. 42/+:/\ ~Z D '! ' Risk Weighted Assets 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
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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 ' / ! > ( + : > * 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 measure credit risk in the calculation of CAR for any exposure that poses 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 # and buildings. These types of collateral have relatively high liquidity value and/or can be legally attached so that the Bank is able to effectively liquidate collateral if the debtor’s/debtor group’s loan becomes delinquent in payment.
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 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
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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
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and economic sectors.
III.B. Disclosure of Market Risk Exposures and