EFFECTIVENESS OF BANK RISK MANAGEMENT SYSTEMS
III. A. Disclosure of Credit Risk Exposures and Implementation of Credit Risk Management
Credit Risk Management Organization
BCA has developed a structured credit risk management process to support strong credit principles with strong internal controls.
1. The Board of Commissioners, approves the Bank’s credit plans and oversees its implementation, approves its basic credit policy and requests 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 the formulation of , 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 organization (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 has principal function of 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’s 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 credit and adjustment of corporate lending rates.
3. The Risk Management Committee has the main function of developing policies, strategies and gudelines 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 effetctive risk management process and system
Risk Management Strategies for Activities with Significant Credit Risk Exposures
BCA formulates a 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 provision.
Structured risk management strategies are based on the following general principles:
s 2ISKMANAGEMENTSTRATEGYSHOULDBELONGTERM oriented for the sustainability of the business by considering economic conditions and cycles;
s #OMPREHENSIVE RISK MANAGEMENT STRATEGY MUST be able to control and manage the risks of BCA and its subsidiaries
s %XPECTEDCAPITALADEQUACYSHOULDBEMAINTAINED and adequate resources need allocated to support the implementation risk management.
The risk management strategies are prepared by considering the following factors:
s %CONOMIC AND BUSINESS DEVELOPMENT AND THE impact that may occur as a result of the risks faced by BCA
s 4HEORGANIZATIONSTRUCTUREOF"#!INCLUDINGTHE adequacy of human resources and supporting infrastructure
s 4HE lNANCIAL CONDITION OF "#! INCLUDING THE ability to generate earnings and the ability to manage the risks arising from both external and internal factors
s 4HECOMPOSITIONANDDIVERSIlCATIONOFTHE"#!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 certin types of loan as well as both individual and business group exposure. Along with monitoring the development of ratings database, technology, human resources, the Bank complexity level , as well as the market and regulations, the Bank’s portfolio management unit actively works serves to optimize the allocation of the Bank’s capital to achieve an acceptable risk level in line with risk appetite and risk tolerance parameters.
Credit Risk Measurement and Control
BCA measures credit risk using a standardized method based on guidelines in accordance with OJK Circular Letter No.42/SEOJK.03/2016 regarding Guidelines for Calculating Risk Weighted Assets for
#REDIT 2ISKS BY 5SING THE 3TANDARDIZED !PPROACH that requires all banks to use risk weighted asset calculations for credit risk by using the standardized approach. BCA uses 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 for the effective implementation of the credit risk management process, comprising:
s %VALUATIONOFTHECREDITADMINISTRATIONPROCESS s !SSESSMENT OF THE ACCURACY IN THE
implementation of internal risk rating and the use of other monitoring tools;
s 0ERFORMANCE 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 potential 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.
Overdue and Impaired Receivables
Past due loans and receivables are defines 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.
Approaches Used for Establishing 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 expected cash flows from a loan, between its expected impaired value based on an estimate of discounted cash 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 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 Standardized 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 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
The credit mitigation method is focused on strong collateral coverage. 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 Exposures and