The Effect of Changes in Risk Analysis Methodology to Minimize Credit Risk (Case Study: PT Bank X)

The Effect of Changes in Risk Analysis Methodology to Minimize Credit Risk (Case Study: PT Bank X)

By Rakhmadi Afif Kusumo 19004069

Undergraduate Program School of Business and Management Institute Technology of Bandung

VALIDATION PAGE

The Effect of Changes in Risk Analysis Methodology to Minimize Credit Risk (Case Study: Bank X)

By: Rakhmadi Afif Kusumo ID No: 19004069

Undergraduate Program School of Business and Management Institute Technology of Bandung

Validated By

Dr.Ir. Sudarso Kaderi W.

COPYRIGHT PAGE

ABSTRACT Risk is a something that almost happens in everyday basis of business which could make loss. Still, in every risk there must be a return as a package with it. Since the development of knowledge, risk management is a rather new knowledge that began famously used for controlling the risk. Although, the improvements of tools of risk management the risk itself won’t be hundred percent eliminated, those tools would only help to minimize. As for this research focuses on the credit risk in banks with the case study of Bank X the initial step of is through analyzing the literature and theories of risk management in banks. Banks business process is very closely related with risk especially credit risk since the cash flow operation of banks is actually by giving loans to their customer even though there are also other risk associated with banks like operational risk and market risk. The risk that bears in this case is, whether the consumer itself would pay back again the principle of loan with the interest. Many banks would implement different methodologies according to the policies and business. The purpose of this research is to see what methodologies that Bank X uses and differentiation with the theories. Bank X is one of the biggest public owned companies that were made by the Indonesian government in 1998. Right now, the banks has served in many big cities in Indonesia. The most interesting part of Bank X case is their capability of managed their non performing loans (NPL) during the years even though have touched a very risky level of unsettled loans at 2005 then decrease their NPL in the year 2006, even the at the latest information gather from quarterly report in 2007 also show a significant growth. Moreover, after further research going on, it is founded that they have changed the methodologies of credit risk management system and which resulted in better performance in managing the loans. These changes didn’t conduct by the old management there was a big restructuring in the human resources especially in the board of director’s team during the crisis era. In addition this research finds that the methodology that were used is similar with the theories but with a modification. This research also resulted that the Bank X conditions is getting prepared for the BASEL II accord that must be implemented in 2008 as instructed by the central Bank of Indonesia. Also the methodologies that being used by Bank X are confirmed to improved the NPL performance. However the new method show a flaw in the process time that compared with the old system which is way faster. Nevertheless, this research also conclude that the people risk have a great role with the credit risk. Mismanagement from the human resource would give bad outcome.

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ABSTRAK Risiko adalah sesuat yang hampir terjadi setiap saat dalam pelaksanaan sebuah bisnis dan risiko tersebut dapat menyebabkan kerugian. Walau risk itu bisa merugikan bagi pelaku bisnis namun di setiap risiko yang mungkin terjadi kesempatan dalam keuntungan pun ada. Seiring dengan perkembangan ilmu pengetahuan manusia, munculah sebuah ilmu akademis baru yaitu manajemen risiko. Dimana sekarang ilmu tersebut sangat terkenal dan digunakan untuk mengatur risiko risiko berbisnis. Namun, dengan adanya berbagai macam cara dalam pengawasan manajemen risiko alat bantu tersebut tidak ada yang dapat menghilangkan secara seluruh risiko yang ada, alat-alat itu hanya bisa membantu mengurangi bobot risiko. Riset ini memfokuskan pada risiko kredit di bank dengan studi kasus Bank X dengan langkah awal yaitu mempelajari dari studi literature dan teori-teori yang bersangkutan dengan manajemen risiko di bank. Proses bisnis perbankan sangat erat dengan risiko lebih khususnya pada risiko kredit, karena operasional arus kas bank ialah dengan memberikan pinjaman pinjaman terhdapad konsumen mereka walau terdapat juga risiko risiko lain seperti risiko operasoinal dan risiko pasar. Risiko kredit yang terjadi disini ialah dimana pinjaman tersebut yang diberikan terdapat kemunkinan bahwa konsumen itu tidak bisa mengembalikan pinjaman pokok serta bunganya. Setiap bank memiliki kebijakan tersindiri dalam melaksanakan metodanya masing-masing yang telah disesuaikan dengan bisnisnya. Tujuan dari penilitian ini ialah melihat metode apa saja yang telah digunakan Bank X dalam manajemen risiko kredit serta memperhatikan perbedaannya dengan apa yang telah ada pada teori-teori. Bank X merupakan salah satu bank terbesar di Indonesia yang didirikan pada tahun 1998 oleh pemerintah hingga sekarang yang telah menjadi perusahaan terbuka. Cabang dari Bank X ini juga telah merambah di berbagai kota besar di Indonesia. Salah satu hal yang paling menarik dari studi kasus Bank X ini ialah dimana Bank ini telah berhasil memperbaiki keadaan pinjaman pinjaman yang bermsalah dari tahun ke tahun. Pada tahun 2005 merupakan tahun yang sangat berbahaya bagi Bank X tingkat pinjaman bermasalah sudah pada level yang sangat tinggi lalu hebatnya mereka dapat mengurangi pinjaman masalah tersebut di tahun berikutnya 2006, bahkan pada laporan kuartal pada awal 2007 menunjukan peningkatan yang signifikan. Lalu, dengan penilitian yang lebih lanjut, peniliti juga menemukan bahwa Bank X telah melakukan perubahan dalam hal metodologi manajemen risiko kredit dimana hal tersebut menyebabkan performa bank yang lebih baik dari segi risiko kredit. Perubahan ini tidak dilaksanakan oleh pihak manajemen yang lama melainkan setelah adanya restrukturisasi hingga menjadi manajemen baru yang terjadi setelah adanya krisis khususnya di tingkat direksi. Hal lain yang ditemukan ialah metode yang digunakan oleh Bank X mirip dengan teori yang ada namun ada beberapa perubahan. Riset ini juga menghasilkan beberapa temuan yaitu Bank X sedang mempersiapkan kondisinya untuk pelaksanaan BASEL II di tahun yang telah ditetapkan Bank Indonesia di 2008. Lalu, metode manajemen risiko kredit yang digunakan telah terbukti dapat memperbaiki performa kredit macet Bank X, akan tetapi metode ini juga memiliki kelemahan dalam kecepatan dalam pengambilan keputusan jika dibandingkan dengan metode yang lama. Adapula, kesimpulan lain ialah bahwa risko sumber daya manusia dapat mempengaruhi risiko kredit, karena salah kebijakan manejemen dapat menyebabkan hasil yang tidak maksimal.

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FOREWORD Alhamdulillahi Robbil ‘Alamin, as an expression of thanks to the god almighty because with all of the blessings and grace from god. Since the writer capable to finish the final project as a compulsory condition to be graduated from the undergraduate program in School of Business and Management, Institute Technology of Bandung as the class of 2007. During the process the writer had encounter many difficulties with the limitation of tightness in time of work, power, skill and knowledge. Thus, in this chance the writer want give an appreciation and gratitude to all the people and the institutions that gladly give a support in completing this task, 1. DR. Ir. Sudarso Kaderi Wiryono as my counsel lecturer for this final project who patiently had guided me and spent some time during the process of final project. 2. Prof. Surna Tjahja Djajadiningrat, PhD, dean of SBM ITB who constantly encouraging the students. 3. Dr. Ir. Utomo Sarjono Putro, M.Eng, program director of SBM ITB. 4. All of the people from the Bank X who I could not mention it the names as had given the discussions and chance to access the data for this research. 5. The administration teams in SBM ITB, who have provide excellent service for academic requirements. 6. My beloved parents who always supporting me. 7. My family, my brother, my sister that always gives attention. 8. My grandparents who always motivating in spiritually. 9. All my friends in SBM ITB from the class of 2007, 2008 and 2009 who always gives joy and spirit. Finally, with all due respect and humbleness the writer admits that this research is far from perfection, however there is a hope of this research would give a benefit to many parties, at least for the writer itself. Bandung, July 2007 Rakhmadi Afif Kusumo iii

TABLE OF CONTENTS ABSTRACT........................................................................................................................... i ABSTRAK ............................................................................................................................ ii FOREWORD ...................................................................................................................... iii LIST OF CONTENTS ..........................................................................................................v LIST OF FIGURES .......................................................................................................... viii LIST OF TABLES .............................................................................................................. ix

CHAPTER I - INTRODUCTION .......................................................................................1 1.1. Background ..............................................................................................................1 1.2. Problem Formulation ................................................................................................2 1.3. Importance of Problem Solving ...............................................................................3 1.4. Scope of Limitation and Assumption .......................................................................3 1.5. Writing Structure ......................................................................................................4

CHAPTER II – LITERATURE STUDY ............................................................................5 2.1.Credit Risk.................................................................................................................5 2.1.1. Type of Credit Risk by Consumer ....................................................................8 2.2. Credit Risk Analysis .................................................................................................8 2.2.1. Creditworthiness According to Sovereign Risk................................................9 2.2.2. Creditworthiness According to Corporate Credit Risk .....................................9 2.2.3. Creditworthiness According to Personal Credit Risk .......................................9 2.3. Credit Concentration Risk ........................................................................................9 2.4. Qualitative Method of Credit Risk Analysis ............................................................9 2.5. Quantitative Method of Credit Risk Analysis ........................................................11 2.6. International Credit Risk Standard .........................................................................15 2.6.1. BASEL II ........................................................................................................15 2.7. Central Bank Regulations of Credit Risk ...............................................................18

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CHAPTER III – RESEARCH METHODOLOGY ........................................................ 21 3.1. Research Design .................................................................................................... 21 3.2. Research Steps ....................................................................................................... 21 3.3. Preface Studies ...................................................................................................... 22 3.4. Problem Identification ........................................................................................... 23 3.5. Research Objective ................................................................................................ 23 3.6. Study Literature ..................................................................................................... 23 3.7. Type and Source of Data ....................................................................................... 22 3.8. Data Collection ...................................................................................................... 24 3.8.1. Techniques to Acquire Data........................................................................... 24 3.9. Research Variables ................................................................................................ 25 3.10. Analysis and Review ........................................................................................... 26 3.11. Conclusion and Recommendation ....................................................................... 26

CHAPTER IV – DATA COLLECTION AND ANALYSIS .......................................... 27 4.1. Data Collection ...................................................................................................... 27 4.1.1. Object Research Profile ................................................................................. 27 4.1.2. Bank X Organization Structure ...................................................................... 28 4.1.3. Bank X NPL Performance ............................................................................. 29 4.1.3. Bank X Credit Composition........................................................................... 30 4.2. Bank X Credit Risk Management.......................................................................... 32 4.2.1. Bank X Credit Risk Workflow ...................................................................... 33 4.3. Credit Risk Tools Analysis Compared with Theories ........................................... 37 4.4. Radical Changes of Bank X Management............................................................. 37 4.5. Latest Credit Approval System ............................................................................. 38 4.6. Past Credit Approval System................................................................................. 39 4.7. Qualitative Data Analysis of the Credit Approval Scheme ................................... 40 4.8. Credit Restructuring System.................................................................................. 41 4.9. NPL Ratios of Credit Risk Key Indicators ............................................................ 42 4.10. Productive Asset Quality Report ......................................................................... 43 4.11. Quantitative Data Analysis .................................................................................. 45 4.11.1. NPL Ratios ................................................................................................... 46 vi

4.11.2. Productive Asset Quality ..............................................................................46 CHAPTER V – CONCLUSION AND RECOMMEDANTION ....................................49 5.1. Conclusion ..............................................................................................................49 5.2. Recommendation ....................................................................................................50 5.2.1. Recommendation for Bank X .........................................................................50 5.2.2. Recommendation for Other Banks and Non-Bank Institutions ......................50

REFERENCES....................................................................................................................51

APPENDIX ..........................................................................................................................52

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LIST OF FIGURES

Figure 2.1. – Typology of Risks ............................................................................................. 6 Figure 2.2. – BASEL II Accord ........................................................................................... 16 Figure 3.1. – Research Methodology Scheme ...................................................................... 22 Figure 4.1. – Bank X Organization Structure ....................................................................... 28 Figure 4.2. – Bank X NPL Highlights 2004-2006 ............................................................... 29 Figure 4.3. – Bank X Credit Composition 2004................................................................... 30 Figure 4.4. – Bank X Credit Composition 2005................................................................... 31 Figure 4.5. – Bank X Credit Composition 2006................................................................... 31 Figure 4.6. – Bank X Credit Rating Workflow .................................................................... 33 Figure 4.7. – Bank X Latest Credit Approval Scheme ......................................................... 38 Figure 4.8. – Bank X Previous Credit Approval Scheme .................................................... 39 Figure 4.9. – Bank X Credit Restructuring Scheme ............................................................. 41 Figure 4.10. – NPL Ratios Graphic of Bank X Credit Risk Key Indicators ........................ 43 Figure 4.11. – Bank X Productive Asset Quality Analysis Graphic .................................... 45

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LIST OF TABLES

Table 2.1. – Pefindo Rating I ................................................................................................ 11 Table 2.2. – Pefindo Rating II............................................................................................... 12 Table 3.1. – Credit Risk Key Indicators ............................................................................... 25 Table 3.2. – Productive Asset Quality Analysis ................................................................... 26 Table 4.1. –Bank X Credit Composition 2004-2006 ............................................................ 30 Table 4.2. – NPL Ratios of Bank X Credit Risk Key Indicators .......................................... 40 Table 4.3. – Bank X’s Loans Report ....................................................................................... 40 Table 4.4. – Bank X’s Productive Asset Quality....................................................................... 42 Figure 4.5. – Bank X’s Loans, Capital and Profit Report ......................................................... 42

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