2Agenda Credit Risk Management Overview Structure of Organization Credit Policy and ProsedureLoan Portfolio ManagementCredit MonitoringCredit Recovery
3Credit Risk Management Overview Risk Management FrameworkThe Evolution of The Risk Management FunctionBasel Capital Accord-IICredit Risk Management
4Risk Management Framework MeasurementEstablising and develop appropriate risk measurement methodologistUnderstanding asssumptions and limitationsStrategyIdentifying and evaluating all the risks inherent in the organization’s activitiesEstablishing a firm-wide risk tolerance and appetite levelDeveloping guidelines for managing riskOperations/SystemsDefining processes and controls for managing riskSpecifying management information requirementsProcuring appropriate systemsOrganizationEstablishing clear accountabilities for risk managementDeveloping competencies and expertise to manage risk succesfullyRiskManagementFramework
5The evolution of The Risk Management Function PolicemanStrong focus on compliance to policies and proceduresGuardianEducating and guiding Business Unit;Evolving Basic ToolsAdvocateTechnically Competent Supportive to Business needsStrategic PartnerAligned Business Partners and Strategies
6Basel Capital Accord – II The New Accord Consists of Three Pillars :FIRST PILLAR: MINIMUM CAPITAL REQUIREMENTCALCULATION OF MIN. CAPITAL REQUIREMENTS :-CREDIT RISK- STANDARDIZED APPROACH-CREDIT RISK – IRBA ( INTERNAL RATING BASED APPROACH)ASSET SECURITIZATIONOPERATIONAL RISKMARKET RISK & TRADONG BOOK ISSUESECOND PILLAR :SUPERVISORY REVIEW of CAPITAL ADEQUACYIMPORTANCE OF SUPERVISORY REVIEWFOUR KEY PRINCIPLES OF SUPERVISORY REVIEWOTHER ASPECTS OF SUPERVISORY REVIEW PROCESSTHIRD PILLAR : PUBLIC DICLOSURE/MARKET DISCIPLINEGENERAL RULESDISCLOSURES -SCOPE OF APPLICATIONDISCLOSURES–STRUCTURE OF CAPITALDISCLOSURES- RISK EXPOSURE AND ASSEMENTDILOSURES- CAPITAL ADEQUACY
7Basel Capital Accord – II Pilar 1 : Minimum Capital RequirementTidak berubahPada Intinya tidak berubah dibanding denganBasel 1, hanya pada basel 2 dimungkinkanDitambah Tier 3 Capital *TOTAL CAPITAL= MINIMUM 8 %(CREDIT RISK+MARKET RISK+OPR.RISK)Tidak berubah menacu pada basel 1996Lebih di elaboratebaruDIHITUNG 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.
8Basel Capital Accord – II Pengembangan Manajemen RisikoMETODOLOGIPENGUKURANRISIKOBERDASARKANBIDANG RISIKOStandardized ApproachFoundation Internal Rating Based ApproachAdvanced Internal Rating Based ApproachRISIKOKREDITRISIKOPASARStandardized ApproachInternal Models ApproachRISIKOOPERASIONALBasic Indicators ApproachStandardized ApproachAdvanced Measurement ApproachPemilihan metode disesuaikan dengan kondisi dan kompleksitas bisnis bank
9Credit Risk Management Pengertian Credit RiskRisiko 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 mitigationProbability of default mengembangkan kemungkinan :1. Debitur tidak dapat memenuhi Kewajibannya baik pokok , bunga dan fee2. Debitur cenderung mengalami “credit loss” seperti : “charge off”, provisi khusus, dan restrukturisasi.3. Memiliki tunggakan pokok, bunga dan fee lebih dari 90 hari4. Debitur dinyatakan pailit oleh pengadilan(Basel Capital Accord)
10Credit Risk Management credit risk mitigation(Methods of managing credit risk)Grading models for individual loansLoan portofolio managementSecuritizationCollateralCash flow monitoringRecovery management
11Credit Risk Management Pemilihan metode untuk menghitung credit risk capital.StandardizedapproachFoundation InternalRating Based ApproachAdAdvanced InternalRating Based approachMerupakan penyesuaian atasstandart Bobot risiko yangtelah ada dalamBasel 1Kurang”risk sensitive”Sedikit perubahan yangdilakukanMenggunakan formulasi internal dalam menentukan bobot risikoSumber 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 approachSumber Input data merupakan data historis bankSangat ”risk sensitive”Memerlukan ekspertis dalam menghitung bobot resiko, benefit sangat signifikan dibanting standart approachMasih banyak digunakan di negara-negara berkembangSaai ini telah banyak diaplikasikan di beberapa negara-negara Eropa, Amerika, Australia dan beberapa bank besar di Asia.
12Credit Risk Management Priciples for the Management of CreditRisk (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)
13Credit Risk Management The goal for the Management of CreditRiskTo maximize a bank risk-adjusted rate ofreturn by managing credit risk expansionwithin acceptable parameters
14Credit Policies and Procedures PurposeThe most important suggested elements of a weel-written Loan policySteps in the Credit ProcessCredit analysis/Credit Risk Assesment
15PurposeUntuk meyakini kredit yang berikan telah memenuhi standar peraturan yang berlaku dan menguntungkanUntuk memberikan petunjuk pelaksanaan dalam proses pemberianTo provide specific guidelines in making individual loan decisions and in shaping the overall loan portfolio
16The 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 committeeLines of responsibility in making assigments and reporting information within loan departmentOperating procedures for soliciting, reviewing, evaluating and making decisions on customer loan applicationsThe required documentation that is to accompany each loan application and what must be kept in the bank credit fileLine of authority within the bank detailing who is responsible for maintaining and reviewing the credit files
17The suggested elements of a weel-writte Loan policy Guidelines for taking, evaluating, and perfecting loan collateralA presentation of policies and procedures for setting loan interest rates and fees and the terms for repayment of loansA Statement of quality standars applicable to all loansA 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 comeThe preferred procedures for detecting, analyzing, and working out problem loan situations.
18Steps in the Credit Process Data and information gathering (Customer,BusinessGovernment, General Economics Information)Solicitation, site visit, interviewFulfil several crucial documents the bank requiresCredit Analysis/Credit Risk AssesmentCredit Approval by the appropriate loan committeeLoan Agreement signingContinuous Monitoring, to ensure:The term of the loan are being followedAll required payments of principal and interest are fulfilled as promised
19Credit 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?
20Credit analysis/Credit Risk Assesment The Borrower Creditworthy:To make sure the customer has an ability and willingness to repay the loanThe following six aspects must be satisfactory:CharacterResponsible attitude, truthfulness, serious purpose and serious intention to repay the loanCapacityThe authority to request a loan and the legal standing to sign a binding loan agreement
21Credit analysis/Credit Risk Assesment The Borrower CreditworthyCash/CapitalThe ability to generate enough cash-in the form of cash flow-to repay the loanThree sources to repay the loans:Cash flow generated from sales or income (the bank’s strong preference)The sale or liquidation of assetsFunds raised by issuing debt or equity securitiesCash flow = Net profits (or Total Revenues less all Expenses) + Noncash Expenses (especially depreciation)CollateralHaving 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
22Credit analysis/Credit Risk Assesment ConditionsCustomer’s current position industry and expected market shareCustomer’s performance vis-à-vis comparable firms in the same industryCompetitive climate for customer’s productSensitivity of customer and industry to business cycles an changes in technologyLabor market conditions in customer’s industry or market areaImpact of inflation on customer’s balance sheet and cash flowLong-run industry or job outlookRegulations, political and environmental factors affecting he customer, business and industry
23Credit analysis/Credit Risk Assesment ControlApplicable laws and regulation regarding the character and quality of acceptable loanAdequate documentation for examiners who may review the loanCorrectly prepared loan documentsConsistency of loan request with bank’s written policyInputs from noncredit presonal (such as economist or political experts) on the external afffecting loan repayment
24Loan Portfolio Management To ensure that the bank lending is not overly concentrated in any one area of business either by geographic, industry or credit gradesRisk concentrations are the single most important cause of major problem in bankingSuch concentration include significant exposure to:An individual counterparty or group of related counterpartiesEconomics sector or geographical regionReliance on an activity or commodityCollateral type or single counterpartyBasel II, Pilar 2Banks are required to have effective internal policies, system and control, to identify measurement, monitoring and control their credit risk concentration
25Credit Monitoring/Loan Review Why it is important?The constantly changing conditionFluctuations in the economyAffecting the customer’s financial condition and ability to repay a loanThe purpose:To help management spot problem loans more quicklyActs as a continuously check on whether loan officers are adhering to the bank’s own loan policyTo 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
26Credit Monitoring/Loan Review Few general principles of Credit Monitoring/Loan ReviewCarrying out a periodical review of all types of loansStructuring the loan review process, to make sure the most important features of eah loan are cheked, such as:The record of the borrower paymentThe quality and conditions of any collateralThe completeness of loan documentationAn evaluation of whether the borrower’s financial condition and forecast have changedAn assesment od whether the loan conforms to the bank’s loan policiesReviewing the largest loans most frequentlyConducting more frequent review of troubled loanAccelerating 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
27Credit Recovery What are the principal causes of failure among banks: Ban loansManagement errorCriminal Activity (Fraud)Adverse economics conditionIndicator of Weak or Trobled LoanIrregular or delinquent loan paymentsFrequent alterations in loan termsUnusual or unexpected increase in accounts receivable and /or inventoriesRising leverage ratio (debt to net-worth)Missing documentation (i.e the customer financial statement)Poor-quality collateralReliance on reappraisals of assets to increase the customer’s net worthAbsence of cash flow statementsCustomer reliance on nonrecurring sources of fund to repay loan (1.e. selling building/equipment)
28Credit Recovery Indicators of Poor Credit Policies Poor selection of risks among borrowing customersFailure to specify a plan for the lquidation of loansHigh proportion of loans made to borrowers outside the bank’s trade territoryIncomplete credit filesSubstantial self-dealing credits (loans to insiders- employees, directors or stockholders)Lending money to support speculative purchasesLack sensitivity to changing economic conditions
29Credit Recovery The key steps to handle problem loans: Keep the goal of loan firmly in mind: to maximize the chances for full recovery of fundsRapid detections and reporting of any problems with a loan are essentialThe 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 optionsEstimate what resources are available to collect the troubled loan, including the estimated liquidation values of assets abd depositsConduct a tax and litigation search, to see other unpaid obligationsEvaluate the quality, competence and integrity of the borrower’s current managementVisit site to assess the borrower’s property and operationMust consider all reasonable alaternatives for cleaning up the troubled loans
30Types of Business Loans Short-Term LoansSelf-liquidating inventory loansWorking capital loansSecurity dealer financingAsset-based loans (accounts receivable loans, factoring, inventory financing)Long-Term LoansTerm loans to support the purchase of equipment or the construction of physical facilitiesRevolving Credit FinancingLong-Term Project Loans (Project Financing)Loans to support Acquitions