Credit Risk Management Overview Risk Management Framework The Evolution of The Risk Management Function Basel Capital Accord-II Credit Risk Management
Risk Management Framework Measurement Establising and develop appropriate risk measurement methodologist Understanding asssumptions and limitations Strategy Identifying and evaluating all the risks inherent in the organization’s activities Establishing a firm- wide risk tolerance and appetite level Developing guidelines for managing risk Operations/Systems Defining processes and controls for managing risk Specifying management information requirements Procuring appropriate systems Organization Establishing clear accountabilities for risk management Developing competencies and expertise to manage risk succesfully
The evolution of The Risk Management Function Policeman Strong focus on compliance to policies and procedures Guardian Educating and guiding Business Unit;Evolving Basic Tools Advocate Technically Competent Supportive to Business needs Strategic Partner Aligned Business Partners and Strategies
Basel Capital Accord – II The New Accord Consists of Three Pillars : FIRST PILLAR: MINIMUM CAPITAL REQUIREMENT CALCULATION OF MIN. CAPITAL REQUIREMENTS : -CREDIT RISK - STANDARDIZED APPROACH -CREDIT RISK – IRBA ( INTERNAL RATING BASED APPROACH) ASSET SECURITIZATION OPERATIONAL RISK MARKET RISK & TRADONG BOOK ISSUE SECOND PILLAR : SUPERVISORY REVIEW of CAPITAL ADEQUACY IMPORTANCE OF SUPERVISORY REVIEW FOUR KEY PRINCIPLES OF SUPERVISORY REVIEW OTHER ASPECTS OF SUPERVISORY REVIEW PROCESS THIRD PILLAR : PUBLIC DICLOSURE/MARKET DISCIPLINE GENERAL RULES DISCLOSURES -SCOPE OF APPLICATION DISCLOSURES– STRUCTURE OF CAPITAL DISCLOSURES- RISK EXPOSURE AND ASSEMENT DILOSURES- CAPITAL ADEQUACY
Basel Capital Accord – II Pilar 1 : Minimum Capital Requirement Pada Intinya tidak berubah dibanding dengan Basel 1, hanya pada basel 2 dimungkinkan Ditambah Tier 3 Capital * TOTAL CAPITAL ( CREDIT RISK+MARKET RISK+OPR.RISK ) Lebih di elaborate Tidak berubah menacu pada basel 1996 baru Tidak berubah = MINIMUM 8 % DIHITUNG BERDASAR PROFIL RISIKO BANK *) Definisi pemodalan ditetapkan dengan tiga peringkat (Tiers).1 Tier 1 adalah ekuitas pemilik modal dan laba yang ditahan. 2. Modal pelengkap (Tier 2) sebagai tambahan modal internal dan eksternal yang tersedia pada bank. 3. Bank harus dapat memelihara setidaknya detengah dari modal bersumber dari modal inti. Tier 3 Capital dimungkonkan berasal dari Surat berharga yang memang untuk mengcover market risk.
Basel Capital Accord – II Pengembangan Manajemen Risiko METODOLOGI PENGUKURAN RISIKO BERDASARKAN BIDANG RISIKO Standardized Approach Foundation Internal Rating Based Approach Advanced Internal Rating Based Approach Standardized Approach Internal Models Approach Basic Indicators Approach Standardized Approach Advanced Measurement Approach RISIKO KREDIT RISIKO PASAR RISIKO OPERASIONAL Pemilihan metode disesuaikan dengan kondisi dan kompleksitas bisnis bank
Credit Risk Management Pengertian Credit Risk Risiko dimana kewajiban pembayaran kembali tidak dapat dilakukan oleh nasabah, secara tepat waktu atau tidak sesuai dengan nominal kontrak. (risiko telah dikurangi dengan nilai yang dimitigasi/”risk navigation”) Exosure at Default (EAD) = Probability of Default x Nominal Eksposur. Credit Risk = EAD – Risk mitigation Probability of default mengembangkan kemungkinan : 1. Debitur tidak dapat memenuhi Kewajibannya baik pokok, bunga dan fee 2. Debitur cenderung mengalami “credit loss” seperti : “charge off”, provisi khusus, dan restrukturisasi. 3. Memiliki tunggakan pokok, bunga dan fee lebih dari 90 hari 4. Debitur dinyatakan pailit oleh pengadilan (Basel Capital Accord)
Credit Risk Management Pemilihan metode untuk menghitung credit risk capital. Standardized approach Foundation Internal Rating Based Approach AdAdvanced Internal Rating Based approach Merupakan penyesuaian atas standart Bobot risiko yang telah ada dalam Basel 1 Kurang”risk sensitive” Sedikit perubahan yang dilakukan Menggunakan formulasi internal dalam menentukan bobot risiko Sumber Input data berasal baik dari internal maupun eksternal (regulator/statistik) Cukup/moderate”risk sensitive” Memerlukan ekspertis dalam menghitung bobot resiko, benefit cukup signifikan dibanting standart approach Sumber Input data merupakan data historis bank Sangat ”risk sensitive” Memerlukan ekspertis dalam menghitung bobot resiko, benefit sangat signifikan dibanting standart approach Masih banyak digunakan di negara-negara berkembang Saai ini telah banyak diaplikasikan di beberapa negara-negara Eropa, Amerika, Australia dan beberapa bank besar di Asia.
Credit Risk Management Priciples for the Management of Credit Risk (16 principles) Establishing an appropriate credit risk environment (3 principles) Operating under a sound credit granting process (4 principles) Maintaining an appropriate credit administration, measurement and monitoring process (6 principles) Monitoring adequate controls over credit risk (3 principles)
Credit Risk Management The goal for the Management of Credit Risk To maximize a bank risk-adjusted rate of return by managing credit risk expansion within acceptable parameters
Credit Policies and Procedures Purpose The most important suggested elements of a weel-written Loan policy Steps in the Credit Process Credit analysis/Credit Risk Assesment
Purpose Untuk meyakini kredit yang berikan telah memenuhi standar peraturan yang berlaku dan menguntungkan Untuk memberikan petunjuk pelaksanaan dalam proses pemberian To provide specific guidelines in making individual loan decisions and in shaping the overall loan portfolio
The suggested elements of a weel-writte Loan policy A goal statement for the loan portfolio (in terms of types,maturities, sizes and quality of loans) Specification of the lending authority given to each loan officer and loan committee Lines of responsibility in making assigments and reporting information within loan department Operating procedures for soliciting, reviewing, evaluating and making decisions on customer loan applications The required documentation that is to accompany each loan application and what must be kept in the bank credit file Line of authority within the bank detailing who is responsible for maintaining and reviewing the credit files
The suggested elements of a weel-writte Loan policy Guidelines for taking, evaluating, and perfecting loan collateral A presentation of policies and procedures for setting loan interest rates and fees and the terms for repayment of loans A Statement of quality standars applicable to all loans A Statement of the preferred upper limit for total loans oustanding (i.e. the maximum ratio of total loans to total assets allowed) A description of the bank’s principal trade area, from which most loans should come The preferred procedures for detecting, analyzing, and working out problem loan situations.
Steps in the Credit Process Data and information gathering ( Customer,Business Government, General Economics Information) Solicitation, site visit, interview Fulfil several crucial documents the bank requires Credit Analysis/Credit Risk Assesment Credit Approval by the appropriate loan committee Loan Agreement signing Continuous Monitoring, to ensure: The term of the loan are being followed All required payments of principal and interest are fulfilled as promised
Credit analysis/Credit Risk Assesment What makes good loans? Three major question, regarding each loan aplication, must be satisfactorily answered: Is the borrower creditworthy? Can the loan agreement be properly structured and documented? Can the bank perfect its claim againts the assets or earnings of the customer that will be pledged as collateral?
Credit analysis/Credit Risk Assesment The Borrower Creditworthy: To make sure the customer has an ability and willingness to repay the loan The following six aspects must be satisfactory: Character Responsible attitude, truthfulness, serious purpose and serious intention to repay the loan Capacity The authority to request a loan and the legal standing to sign a binding loan agreement
Credit analysis/Credit Risk Assesment The Borrower Creditworthy Cash/Capital The ability to generate enough cash-in the form of cash flow-to repay the loan Three sources to repay the loans: Cash flow generated from sales or income (the bank’s strong preference) The sale or liquidation of assets Funds raised by issuing debt or equity securities Cash flow = Net profits (or Total Revenues less all Expenses) + Noncash Expenses (especially depreciation) Collateral Having adequate net worth or own enough quality assets (as second way out of the source of the loan repayment). The pledged asset should be: legally secured, having economics value, marketable. Other guarantees: Corporate guarantee and Personal guarantee
Credit analysis/Credit Risk Assesment Conditions Customer’s current position industry and expected market share Customer’s performance vis-à-vis comparable firms in the same industry Competitive climate for customer’s product Sensitivity of customer and industry to business cycles an changes in technology Labor market conditions in customer’s industry or market area Impact of inflation on customer’s balance sheet and cash flow Long-run industry or job outlook Regulations, political and environmental factors affecting he customer, business and industry
Credit analysis/Credit Risk Assesment Control Applicable laws and regulation regarding the character and quality of acceptable loan Adequate documentation for examiners who may review the loan Correctly prepared loan documents Consistency of loan request with bank’s written policy Inputs from noncredit presonal (such as economist or political experts) on the external afffecting loan repayment
Loan Portfolio Management To ensure that the bank lending is not overly concentrated in any one area of business either by geographic, industry or credit grades Risk concentrations are the single most important cause of major problem in banking Such concentration include significant exposure to: An individual counterparty or group of related counterparties Economics sector or geographical region Reliance on an activity or commodity Collateral type or single counterparty Basel II, Pilar 2 Banks are required to have effective internal policies, system and control, to identify measurement, monitoring and control their credit risk concentration
Credit Monitoring/Loan Review Why it is important? The constantly changing condition Fluctuations in the economy Affecting the customer’s financial condition and ability to repay a loan The purpose: To help management spot problem loans more quickly Acts as a continuously check on whether loan officers are adhering to the bank’s own loan policy To aid senior management and the BOD in assesing the bank’s overall exposure to risk and its possible need for more capital in the future
Credit Monitoring/Loan Review Few general principles of Credit Monitoring/Loan Review Carrying out a periodical review of all types of loans Structuring the loan review process, to make sure the most important features of eah loan are cheked, such as: The record of the borrower payment The quality and conditions of any collateral The completeness of loan documentation An evaluation of whether the borrower’s financial condition and forecast have changed An assesment od whether the loan conforms to the bank’s loan policies Reviewing the largest loans most frequently Conducting more frequent review of troubled loan Accelerating the loan review schedule if the economy slows down or if the industries in which the bank has made a substansial portion of its loan show significat problems
Credit Recovery What are the principal causes of failure among banks: Ban loans Management error Criminal Activity (Fraud) Adverse economics condition Indicator of Weak or Trobled Loan Irregular or delinquent loan payments Frequent alterations in loan terms Unusual or unexpected increase in accounts receivable and /or inventories Rising leverage ratio (debt to net-worth) Missing documentation (i.e the customer financial statement) Poor-quality collateral Reliance on reappraisals of assets to increase the customer’s net worth Absence of cash flow statements Customer reliance on nonrecurring sources of fund to repay loan (1.e. selling building/equipment)
Credit Recovery Indicators of Poor Credit Policies Poor selection of risks among borrowing customers Failure to specify a plan for the lquidation of loans High proportion of loans made to borrowers outside the bank’s trade territory Incomplete credit files Substantial self-dealing credits (loans to insiders- employees, directors or stockholders) Lending money to support speculative purchases Lack sensitivity to changing economic conditions
Credit Recovery The key steps to handle problem loans: Keep the goal of loan firmly in mind: to maximize the chances for full recovery of funds Rapid detections and reporting of any problems with a loan are essential The loan work out responsibility should be separate from the lending function (to avoid conflict of interest) Loan workout specialists should confer with the troubled customer quickly on possible options Estimate what resources are available to collect the troubled loan, including the estimated liquidation values of assets abd deposits Conduct a tax and litigation search, to see other unpaid obligations Evaluate the quality, competence and integrity of the borrower’s current management Visit site to assess the borrower’s property and operation Must consider all reasonable alaternatives for cleaning up the troubled loans
Types of Business Loans Short-Term Loans Self-liquidating inventory loans Working capital loans Security dealer financing Asset-based loans (accounts receivable loans, factoring, inventory financing) Long-Term Loans Term loans to support the purchase of equipment or the construction of physical facilities Revolving Credit Financing Long-Term Project Loans (Project Financing) Loans to support Acquitions