THE APPLICATION OF RISK MANAGEMENT AS A PRUDENTIAL
PRINCIPLE IN BANK LENDING
1.0 Introduction :
National Development as a series of continuous development efforts covering the entire life of the
community, nation and state to carry out the task of realizing the national goals set out in the preamble of
the 1945 Constitution of the Republic of Indonesia, namely protecting the entire nation and all Indonesian
blood spills, advancing public welfare, educating the nation's life, and participating in implementing
world order based on independence, lasting peace and social justice.
Empowerment of the community and all national economic forces in economic development is a
good step, considering that development requires the availability of large amounts of funds which
requires the participation of all components of the nation to participate in development activities, giving
rise to a mechanism for the circulation of funds from and for the community managed by a financial
institution, in this case a bank financial institution.
Banks are part of financial institutions that have an intermediary function that bridges the interests
of parties with excess funds (creditors) and parties who need funds (debtors). Based on this function,
banks are referred to as intermediary institutions. Besides having this general function, it also has a
special function, which is directed as an agent of development, namely as an institution that aims to
support the implementation of development and its results, economic growth and national stability
towards improving the lives of many people (Hermansyah, 2007: 41). Banks are part of financial
institutions that have an intermediary function that bridges the interests of parties with excess funds
(creditors) and parties who need funds (debtors). Based on this function, banks are referred to as
intermediary institutions.
Banks in channeling their funds, among others, through lending, are one source of funds for
development, because the rotation of the wheels of the business world is highly dependent on credit
issued by banks which will be used as capital for business, this is evident when in recent years the
banking world has been hit by a slump, causing the impact of many entrepreneurs experiencing economic
difficulties.
Loans issued by banks contain risks so that in their implementation banks must pay attention to
sound credit principles, including (Muhamad Djuhamna, 2000: 392):
a. Banks are not allowed to provide credit without a written agreement.
b. Banks are not allowed to provide credit to businesses that have been calculated to be unhealthy and
will cause losses.
c. Banks are not allowed to provide credit for the purchase of shares and working capital in the sale and
purchase of shares or
d. Providing credit beyond the maximum lending limit.
Every bank lending must pay attention to prudential principles and sound banking principles, both
internally and externally. Externally, before a bank credit agreement is made, the bank always conducts
an assessment from various aspects, by applying the provisions of Article 8 and its explanation in the
Banking Law, the bank must have confidence in the debtor's ability to return credit on time, as agreed, the
provisions regarding this guarantee materially lead to economic guarantees. Banking practices usually
assess five aspects of the debtor (the five C's analysis), namely: character, capital, capacity, condition of
economy and collateral.
The implementation of the prudential principle internally for the bank's Human Resources (HR) is
by applying the Principles of Banking Risk Management. Indonesian banking continues to experience
significant changes in shape and character. The policies of the banking authorities, competitive pressures
in the banking and financial markets as well as the increasingly dynamic demands for business
performance and efficiency from stakeholders cause banks to be managed proactively against business
conditions and potential.
The essence of risk management implementation is the adequacy of risk management procedures
and methodologies so that the bank's business activities can still be controlled at an acceptable limit and
benefit the bank. However, given the differences in market conditions and the structure, size and
complexity of the bank's business, there is no one universal risk management system for all banks so that
each bank must build a risk management system in accordance with the risk management function and
organization at the bank.
The regulation of banking risk management principles in Indonesia, through Bank Indonesia as the
Indonesian banking regulator, has provided direction regarding the commitment to risk management
through Bank Indonesia Regulation (PBI) No. 2/27/PBI/2000, dated December 15, 2000, which among
other things stipulates the obligation for banks to have risk management guidelines, clearer instructions
regarding the intended risk management framework were only delivered several years later through PBI
No. 5/8/PBI/2003 as amended by PBI No. 11/25/PBI/2009 concerning the Implementation of Risk
Management in Commercial Banks (hereinafter referred to as PBI on Risk Management). During this
٦time period, banks in Indonesia developed risk management principles and systems based on
international best practices that were adjusted to the needs of each bank.
Financial Services Authority Regulation Number 18/POJK.03/2016 concerning the Implementation
of Risk Management for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016
Number 53, Supplement to State Gazette of the Republic of Indonesia Number 5861). In consideration
that the situation of the external and internal banking environment is experiencing rapid development
which will be followed by increasingly complex risks for banking business activities, the increasing
complexity of risks for banking business activities can increase the need for good governance practices
and the functions of identification, measurement, monitoring, and control of bank risk. The improvement
of the functions of identification, measurement, monitoring, and risk control is intended so that the
business activities carried out by the bank do not cause losses that exceed the bank's ability or that can
disrupt the bank's business continuity. The management of each functional activity of the bank must be
integrated as much as possible into an accurate and comprehensive risk management system and process.
In order to create preconditions and risk management infrastructure, banks are required to take
steps to prepare for the implementation of risk management, transparency is one aspect that needs to be
considered in controlling the risks faced by banks. Thus, improving the quality of risk management
implementation will support the effectiveness of the risk-based bank supervision framework.
The existence of Risk Management is very important in the banking world. There are failures that
have occurred in the banking world in Indonesia due to failure to implement risk management, such as the
risks that have occurred in the 1997 monetary crisis when some experienced business failures which were
eventually liquidated.
The inability of the bank to pay its obligations can destroy not only the bank's shareholders, but
also destroy third parties who place funds in the bank, this is an insolvency risk that comes from a drastic
decline in the value of bank assets which causes a decrease in bank capital that is unable to offset it
(Masyud Ali, 2004: 28). Therefore, it is necessary to be serious and consistent in conducting risk
management for banks in Indonesia. The seriousness of this matter is what underlies Bank Indonesia as a
monetary authority that has the task of regulating and supervising banks, establishing legal products
related to risk management (Ferry N. Idroes, 2006: 52-53). Bank business activities are always faced with
risks, especially risks in lending that have a significant impact on the continuity of the bank's business.
1.1 Problem Formulation:
Based on the background stated, the problem is:
a. How is risk management applied to banking lending as the bank's prudential principle?
b. What are the obstacles in implementing Banking risk management?
1.2 Purpose
a. To analyze the application of risk management in banking lending as a prudential principle of banks.
b. To find out the obstacles in implementing Banking risk management
2.0 Literature Review:
A. Bank Prudential Principles on Banking Credit Agreements.
Banking plays a very important role as a financial institution that provides credit, credit is the main
business activity of banks. The term credit itself comes from the Roman credere which means trust or
credo or creditum which means I believe. So someone who gets credit is someone who has gained the
trust of the creditor (Mariam Darns Badrulzaman, 1983: 21). Based on the general provisions of Article 1
paragraph 11 of Law Number 7 of 1992 as amended by Law Number 10 of 1998 concerning Banking,
what is meant by credit is: "Credit is the provision of money or bills that can be equated with it, based on
an agreement or loan and borrowing agreement between a bank and another party that requires the
borrower to repay his debt after a certain period of time with interest". The essence of granting credit by
banks is due to trust after an in-depth analysis of the good faith and ability and ability of prospective
debtors to repay their debts in accordance with what is promised.
Giving credit means giving trust to the debtor by the creditor even though this trust carries a high
risk, from the description above, the elements contained in the credit can be found, namely (Hasanuddin
Rahman, 1995: 107):
a. Trust, which is the confidence of the credit provider that the credit will be received back within the
agreed period.
b. Time, namely the period between the credit granting period and the credit repayment period, means
that the value of money at the time of granting credit is higher than the value of money that will be
received at the time of returning credit in the future.
c. Degree of Risk, namely the level of risk that will be faced as a period of time that separates the
granting of credit and the return of credit means that the higher the level of risk, because there is an
element of this risk, a credit agreement needs a guarantee.
d. The achievement given is an achievement that can be in the form of goods services or money. In the
development of credit in the modern world, what is meant by achievement in granting credit is
money.
The purpose of prudence is none other than for the bank to always be in a healthy condition, in
other words, to always be liquid and solvent. Through the application of the precautionary principle, it is
hoped that the level of public trust in banks will remain high, so that people are willing and do not
hesitate to deposit their funds in banks.
The obligation to apply the precautionary principle, especially in granting credit, is stated in Article
8 (1) of the Banking Law, namely: "In providing credit or financing based on Sharia Principles,
Commercial Banks are obliged to have confidence based on in-depth analysis or the intention and ability
and ability of the debtor customer to pay off his debts or return the financing in accordance with the
agreement ", Furthermore, the explanation of Article 8 paragraph (1) is: "Credit or financing based on
Sharia Principles provided by banks carries risk, so that in its implementation banks must pay attention to
the principles of credit or financing based on sound Sharia Principles. To reduce this risk, the guarantee of
granting credit or financing based on Sharia Principles in the sense of confidence in the ability and ability
of the debtor customer to pay off its obligations in accordance with the agreement is an important factor
that must be considered by the bank. To obtain this confidence, before granting credit, the bank must
conduct a careful assessment of the character, ability, capital, collateral, business prospects of the debtor
customer."
As Article 8 of the Banking Law states that before providing credit, banks must conduct a careful
assessment, considering that the source of credit funds channeled is not funds from the bank itself, but
funds originating from the public so it is necessary to apply the prudential principle through accurate and
in-depth analysis, distribution that is right on target and meets legal requirements, binding collateral that
is juridically formal in accordance with legal and statutory provisions on collateral, good supervision and
monitoring, legal agreements and regular and complete credit documentation. Everything is intended so
that the distributed credit can be returned on time in accordance with the credit agreement including
principal and interest loans.
The basis for granting healthy credit, in the practice of granting credit, banks are required to assess
various aspects, using the principle of prudence known as prudential banking principles which are
implemented with The Five C's of Credit Analysis (5 C principles), based on the Explanation of Article 8
of the Banking Law, including:
1. The character of the debtor (character), the character or personality of the debtor is an important
element in granting credit, what is meant by character is the good personality of the prospective
debtor, namely those who always keep their promises and try to prevent despicable acts, such
debtors are able to return credit as promised. The ability of the prospective debtor (capacity), in
managing his business, must be known with certainty by the bank from his management
capabilities and human resources, whether he is able to produce well, which can be seen from his
production capacity.
2. Debtor's capital (Capital), to obtain credit, prospective debtors must have capital first, the amount
and structure of the prospective debtor's capital must be researched and the level of ratio and
solvency known.Bank cannot provide credit to entrepreneurs without any capital at all. The capital
and financial capacity of the debtor will have a direct correlation with the level of ability to pay
credit (Mahmoedin, 1995).
3. Collateral Collateral in banking terms is called a collateral object. Collateral is usually defined as
the debtor's property that is used as collateral for his debt. Credit is always overshadowed by risk,
just in case this risk arises, a fortress is needed to save, namely collateral as a means of
safeguarding against risks that may arise from customer breaches in the future.
4. Economic conditions (condition of economy), conditions or situations that have a positive impact
on the prospective debtor's business or as stated in the explanation of Article 8 of the Banking Law,
namely the relationship between macroeconomic factors and product risk. General economic
conditions and conditions in the credit applicant's business sector need attention from the bank to
minimize the risks that may arise due to economic conditions.
5. The good character of a morally honest person can be trusted and is able to manage a company
which can be seen from his management ability, whether he is able to produce well seen from his
production capacity. The assessment of a person's capacity is based on experience in the business
world linked to education as well as the strength of the company and the ability to adjust to
technological developments. The capital and financial capacity of the debtor has a direct correlation
with the level of ability to pay.
In addition to the 5 C analysis as an implementation of the prudential principle in granting credit is the 7P
principle, including (Kasmir, 2000):
1. Personality, namely the assessment of customers in terms of their personality or daily and past
behavior. Personality also includes attitudes, emotions, behavior and customer actions in dealing
with a problem.
2. Parties, namely classifying customers into certain classifications or certain groups based on capital,
loyalty and character, so that customers can be classified into certain groups and will get different
facilities from banks.
3. Purpose, meaning the analysis of the purpose of using credit that has been submitted by
prospective debtors. The purpose of taking credit can vary, for example for working capital or
investment, and so on.
4. Prospect, which is to assess whether the customer's future business is profitable or not, in other
words, has prospects or vice versa, this is important considering that if a credit facility is financed
without having prospects, it is not only the bank that loses but also the customer.
5. Payment, meaning the source of payment of the prospective debtor, this is a measure of how the
customer returns the credit that has been taken or from which sources the funds for credit
repayment. The more sources of income the debtor has, the better, so that if one of his businesses
loses money, it will be covered by other sectors.
6. Profitability, which is an assessment of the prospective debit's ability to make a profit in its
business. Profitability is tracked from pei'iode whether it will remain the same or increase,
especially with additional credit to be obtained.
7. Protection. (protectiori) is an analysis of the means of protection for creditors. The aim is to ensure
that the business and collateral are protected, which can be in the form of collateral, goods or
people or insurance coverage.
B. Regulation on the Implementation of Risk Management for Commercial Banks:
After the regulation and supervision of banks shifted to the Financial Services Authority since
December 31, 2013, as mandated by Law No. 21/2011 on the Financial Services Authority (OJK). The
regulation and supervision of banks is carried out by OJK, thus BI will focus on controlling inflation and
monetary stability. In increasing the supervisory function of the OJK banking sector, it plans to conduct
risk management compliance, which then resulted in the issuance of the Financial Services Authority
Regulation No. 18 /POJK.03/2016 concerning Risk Management Implementation for Commercial Banks.
With the enactment of this POJK, the PBI regarding risk management is no longer valid. Meanwhile,
what is meant by Risk Management in Article 1 point 3 of the POJK regarding Risk Management is a
series of procedures, and methodologies used to identify, measure, monitor and control risks arising from
bank business activities.
In the business world, risk is always there, there is no business without risk, so every time you have
to be able to bear risk, by minimizing risk. Risk is not simply avoided but must be faced in ways that can
minimize the possibility of a loss. Banks that have a high size and complexity of usalra must implement
Risk Management for all of their business activities risk categories, namely Credit Risk, Market Risk,
Liquidity Risk, Operational Risk, Compliance Risk, Legal Risk, Reputation Risk, and Strategic Risk.
Basically, the types of risks faced by banks can be divided into 2 (two) major groups, namely
(Kasmir, 2000):
1. Financial Risk
Financial risks are related to direct losses in the form of loss of money due to risks that occur, such risks
include operational risk, legal risk, credit risk, liquidity risk, reputation risk and market risk.
2. Non-Financial Risk
Non-financial risks are related to losses that cannot be clearly calculated the amount of money lost. The
financial impact of non-financial risks is not immediately felt and cannot directly make the bank
profitable, but in turn non-financial risks have the potential to cause financial losses, such risks include
reputation risk, compliance risk and strategic risk.
3.0 Results and Discussion:
A. Implementation of Risk Management in Banking Lending as a Precautionary Principle of
Banks:
The Bank's business activities are always faced with risks that are closely related to its function as
a financial intermediary institution, especially the risk in providing credit which has a significant impact
on the continuity of the bank's business. The rapid development of the external and internal banking
environment has also led to the increasing complexity of the risks of banking business activities.
Therefore, in order to be able to adapt to the banking business environment, the Bank is required to
implement Risk Management.
Through the implementation of Risk Management, the Bank is expected to better measure and
control the risks faced in conducting its business activities. Furthermore, the implementation of Risk
Management by banks will support the effectiveness of the Risk-based Bank supervision framework
conducted by the Financial Services Authority. Efforts to implement Risk Management are not only
intended for the interests of the Bank but also for the interests of customers. One important aspect in
protecting the interests of customers and in the context of risk control is the transparency of information
related to the Bank's products or activities.
The implementation of Risk Management may vary from one Bank to another in accordance with
the objectives, business policies, size and complexity of the business, financial capabilities, supporting
infrastructure and human resource capabilities. The Financial Services Authority establishes this
provision as a minimum standard that must be met by Indonesian banks in implementing Risk
Management. With this provision, the Bank is expected to be able to carry out all its activities in an
integrated manner in an accurate and comprehensive risk management system, especially in the
implementation of Risk Management.
the bank's business activities in channeling funds through credit.
The provision of credit by banks to customers is due to trust after an in-depth and thorough
analysis of the good faith and ability and ability of prospective debtors to repay their debts in accordance
with the agreement. Lending means giving trust to the debtor by the bank even though this trust carries a
high risk. Every bank lending must pay attention to the principles of prudence and sound banking
principles, both internally and externally. Externally, before a bank credit agreement is made, the bank
always conducts an assessment from various aspects, by applying the provisions of Article 8 and its
explanation in the Banking Law, the bank must have confidence in the debtor's ability to return credit on
time, as agreed.
Banking practice before extending credit assesses five aspects to the debtor or what is known as
The Five C's of Credit Analysis (5C analysis), namely: character, character or personality of the debtor is
an important element in granting credit, what is meant by character is the good, honest personal nature of
prospective debtors, namely those who always keep their promises and try to prevent despicable acts, and
have a sense of responsibility. In this case, it is necessary for the accuracy and accuracy of the credit
analysis to examine the curriculum vitae of the prospective debtor, how the reputation is in the business
environment. Capacity, the target point for assessing debtors is the ability to control the business when
the economy is sluggish. Future business prospects, production and marketing, as well as raw materials,
work equipment, financial administration, and even the ability to win the market are also assessed by the
bank. The next aspect is Capital, to obtain credit the prospective debtor must have capital first, the
amount and structure of the prospective debtor's capital must be researched and the level of ratio and
solvency known. Banks cannot provide credit to entrepreneurs without any capital at all. Collateral,
collateral is usually defined as the debtor's property that is used as collateral for his debts. Given that
credit is always overshadowed by risk, to anticipate the emergence of this risk, collateral is needed as a
means of safeguarding the risks that may arise from the customer's promise in the future. And Condition
of economy, conditions or situations that have a positive impact on the prospective debtor's business or as
stated in the explanation of Article 8 of the Banking Law, namely the relationship between
macroeconomic factors and product risk. General economic conditions and conditions in the credit
applicant's business sector need attention from the bank to minimize the risks that may arise due to
economic conditions. These conditions can be affected by the social, political and economic conditions of
a certain period and estimates that will occur in the future.
Internally, the implementation of the prudential principle for banks is the bank's Human Resources
(HR) by applying the Principles of Banking Risk Management. Indonesian banking continues to
experience significant changes in shape and character. Banking authority policies, competitive pressures
in the banking and financial markets as well as the increasingly dynamic demands for business
performance and efficiency from stakeholders cause banks to be managed proactively against business
conditions and potential.
The Bank must implement Risk Management effectively, both for the Bank individually and for
the Bank on a consolidated basis with its subsidiaries. Conventional Commercial Banks implement Risk
Management covering 8 risks, namely credit risk, market risk, liquidity risk, operational risk, legal risk,
reputation risk, strategic risk, and compliance risk. Meanwhile, Islamic banking business activities are
inseparable from risks that can disrupt the continuity of the bank, and to manage these risks must
implement risk management individually and on a consolidated basis in accordance with Islamic banking
business activities. The implementation of Risk Management in Islamic banking is adjusted to the
objectives, business policies, size, and complexity of the business and the ability of the Bank. Based on
Financial Services Authority Regulation Number 65/POJK.03/2016 concerning the implementation of
risk management for Islamic commercial banks and Islamic business units, including credit risk, market
risk, liquidity risk, operational risk, legal risk, reputation risk, strategic risk, compliance risk, rate of
return risk and equity investment risk.
The scope of Risk Management implementation at least includes, among others, active supervision
of the Board of Directors and the Board of Commissioners, which is the main line of defense to ensure
that the bank they lead is running healthily and complies with all applicable laws and regulations. In order
to carry out its authority and responsibility, the Board of Directors must have an adequate understanding
of the risks inherent in all functional activities of the Bank and be able to take the necessary actions in
accordance with the Bank's risk profile.
Furthermore, the adequacy of Risk Management policies and procedures as well as the
establishment of Risk limits, at least contains, the determination of risks associated with banking products
and transactions, the determination of the use of measurement methods and Risk Management
information systems, the determination of limits and the establishment of Risk tolerance, the
determination of Risk rating assessments, the preparation of contingency plans in the worst case scenario
؛dna the establishment of an internal control system in the implementation of Risk Management.
Meanwhile, Risk Management procedures and the determination of Risk limits must be adjusted to the
level of Risk to be taken (risk appetite) of the Bank's Risk.
In fulfilling the adequacy of the identification process, banks need to collect and accumulate data
on events, including losses that have occurred in the past, in other words based on the bank's loss
experience that has occurred. Risk measurement and monitoring banks need to establish risk objectives
that are seen from the level of likelihood of occurrence and the impact of the assessed risk. Monitoring
risk limits is not only aimed at transactions that exceed limits or activities that deviate from established
policy lines. The Risk Management information system and internal risk control are effective in the
implementation of business and operational activities at all levels of the Bank's organization, and are able
to appropriately manage the risk of the Bank time to detect weaknesses and deviations that occur.
Risk categories related to the distribution of funds through credit include credit risk. The potential
for borrowers or debtor customers to fail is related to the ability to fulfill their obligations in accordance
with the agreement in the credit agreement. This risk is caused by the debtor failing to carry out the
contents of the credit agreement, failing to select prospective debtors in the process of granting credit.
Bank human resources are fooled by the appearance of prospective debtors, in this case the importance of
applying the 5 C principle. For most banks, lending is the largest source of credit risk, the high and low
credit risk is influenced by several factors including credit concentration, counterparty credit risk, and
settlement risk. Credit concentration risk is a risk arising from the concentration of the provision of funds
to 1 (one) party or a group of parties, industry, sector, and / or certain geographic areas that have the
potential to cause substantial losses that can threaten the Bank's business continuity. Counterparty credit
risk is a risk arising from the failure of a counterparty to fulfill its obligations and arises from types of
transactions that have certain characteristics, for example transactions that are affected by movements in
fair value or market value. Settlement risk is the risk arising from the failure to deliver cash and/or
financial instruments on the agreed settlement date of the sale and/or purchase of financial instruments.
Other factors include the quality of credit analysts and the decision-making process, which is
usually linked to insiders, monitoring of the use of credit by debtors, the quality of collateral binding and
overall economic conditions. This risk must be understood, measured and identified before a facility is
provided to a debtor customer. For this reason, it is necessary to assess prospective debtor customers on
the following matters: the character and reputation of the debtor in the market, ownership and good
management, the colateral provided by the debtor meets the binding requirements of the guarantee and
the economic conditions that occur at the time of granting the facility such as competition, the type of
product managed by the debtor customer.
Another risk associated with the distribution of funds through credit is Legal Risk, exposure
arising from weaknesses in juridical aspects, among others due to lawsuits, the absence of supporting
legislation, changes in laws and external regulations that have a negative impact on operational
capabilities. Weakness of engagement such as not fulfilling the legal requirements of an agreement or
imperfect collateral binding.
The next risk is related to the distribution of funds through credit Operational Risk, which is the
risk arising from the inadequacy or malfunction of internal processes, human error or fraud, system
failure in recording, accounting and reporting transactions completely, correctly and on time, failure to
comply with internal regulations and applicable regulations, external problems such as changes in
regulations or external events that affect the Bank's operations. Furthermore, Reputation Risk arises,
among others, due to media coverage or publications and rumors regarding the Bank's business activities.
The bank's communication strategy is not effective. Negative public opinion of the bank's operations,
resulting in a decrease in the number of customers of the bank or incurring large costs due to litigation or
a decrease in the bank's income.
B. Obstacles in Implementing Banking Risk Management:
Risk is always present in the business world, there is no business without risk, in running a Business
activities at all times must be able to bear risks, so it is necessary to find ways to minimize a risk.
Especially banking in Indonesia, where the business carried out by the bank does not cause losses that
exceed the bank's ability or do not interfere with the bank's business continuity.
The existence of Risk Management is very important in the banking world. The essence of
implementing risk management is the adequacy of risk management procedures and methodologies so
that the bank's business activities can still be controlled at an acceptable limit and benefit the bank. Given
the differences in market conditions and the structure, size and complexity of the bank's business, there is
no one universal risk management system for all banks so that each bank must build a risk management
system in accordance with the risk management function and organization at the bank.
Efforts to improve the quality of risk management implementation are not only intended for the
Bank's interests but also for the interests of customers. One important aspect in protecting the interests of
customers and in the context of risk control is the transparency of information related to the Bank's
products or activities. In addition, improving the quality of risk management implementation is expected
to support the effectiveness of the risk-based bank supervision framework.
Banks are required to implement risk management in order to adapt to the banking business
environment. Risk management arrangements based on POJK No. 18
/POJK.03/2016 concerning the Implementation of Risk Management for Commercial Banks, is a
minimum standard that must be met by Indonesian banks in implementing risk management, guidelines to
be able to operate more prudently within the scope of the rapid development of business activities and
banking operations.
The implementation of Risk Management may vary from one Bank to another in accordance with
the objectives, business policies, size and complexity of the business, financial capability, supporting
infrastructure and human resource capability. However, there are still some obstacles in the
implementation of risk management, among others, during the transition period for banks that have not
adjusted their risk management policies to be fully in line with the provisions on the implementation of
risk management. In addition, human resources involved in monitoring the implementation of risk
management are still relatively unprepared. The qualifications of human resources that are not yet clear
for each level of positions related to the implementation of Risk Management, the absence of sufficient
quantity and quality of human resources in the Bank and ensuring that these human resources understand
their duties and responsibilities, both for business units, Work Units, and other units.
Risk Management and supporting units responsible for the implementation of Risk Management, so that
the internal control process in the bank is not in accordance with the guidelines for implementing banking
risk management.
For national banks, it is indeed difficult to implement Basel II, but it is a necessity for national
banks to follow international regulations. Given the function of banking as an intermediary institution and
has a special function as an institution of trust is the most risky business, the existence of problems in one
bank can lead to systemic risks that can undermine other banks so that it will automatically reduce
economic activity. To prevent bad things from happening to the national banking industry, very specific
handling is needed and by applying the precautionary principle. The need to strengthen capital for
national banks, as well as prepare themselves for the fulfillment of information technology (IT) and
human resources.
4.0 Conclusions and Suggestions:
A. Conclusion
1. The implementation of risk management in banking lending as a prudent principle of the bank includes
active supervision of the Board of Directors and Board of Commissioners; adequacy of Risk Management
policies and procedures and the establishment of risk limits; adequacy of risk identification, measurement,
monitoring and control processes, as well as Risk Management information systems; and a
comprehensive intem control system. Lending is the largest source of credit risk, the high and low
credit risk is influenced by several factors including credit concentration, counterparty credit risk, and
settlement risk. Risks associated with lending are credit risk, operational risk, legal risk, and reputation
risk.
2. Constraints in the implementation of Banking risk management, among others, the human resources
involved in monitoring the implementation of risk management are still relatively unprepared. Unclear
qualifications of human resources for each level of positions related to the implementation of Risk
Management.
B. Advice:
The Bank implements Risk Management in accordance with its objectives, business policies,
business size and complexity, and capabilities. The need for employee development and training
including managerial succession plans and adequate remuneration to ensure the availability of competent
employees in the field of Risk Management. Ensure that all human resources understand the strategy, the
level of risk to be taken and the risk tolerance, the Risk Management framework established by the Board
of Directors and approved by the Board of Commissioners and can be implemented consistently in the
activities handled.
Every bank lending must pay attention to prudential principles and sound banking principles, both
internally and externally. Externally, before a bank credit agreement is made, the bank always conducts
an assessment from various aspects, by applying the provisions of Article 8 and its explanation in the
Banking Law, the bank must have confidence in the debtor's ability to return credit on time, as agreed, the
provisions regarding this guarantee materially lead to economic guarantees. Banking practices usually
assess five aspects of the debtor (the five C's analysis), namely: character, capital, capacity, condition of
economy and collateral.
The implementation of the prudential principle internally for the bank's Human Resources (HR) is
by applying the Principles of Banking Risk Management. Indonesian banking continues to experience
significant changes in shape and character. The policies of the banking authorities, competitive pressures
in the banking and financial markets as well as the increasingly dynamic demands for business
performance and efficiency from stakeholders cause banks to be managed proactively against business
conditions and potential.
The essence of risk management implementation is the adequacy of risk management procedures
and methodologies so that the bank's business activities can still be controlled at an acceptable limit and
benefit the bank. However, given the differences in market conditions and the structure, size and
complexity of the bank's business, there is no one universal risk management system for all banks so that
each bank must build a risk management system in accordance with the risk management function and
organization at the bank.
The regulation of banking risk management principles in Indonesia, through Bank Indonesia as the
Indonesian banking regulator, has provided direction regarding the commitment to risk management
through Bank Indonesia Regulation (PBI) No. 2/27/PBI/2000, dated December 15, 2000, which among
other things stipulates the obligation for banks to have risk management guidelines, clearer instructions
regarding the intended risk management framework were only delivered several years later through PBI
No. 5/8/PBI/2003 as amended by PBI No. 11/25/PBI/2009 concerning the Implementation of Risk
Management in Commercial Banks (hereinafter referred to as PBI on Risk Management). During this
٦time period, banks in Indonesia developed risk management principles and systems based on
international best practices that were adjusted to the needs of each bank.
Financial Services Authority Regulation Number 18/POJK.03/2016 concerning the Implementation
of Risk Management for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016
Number 53, Supplement to State Gazette of the Republic of Indonesia Number 5861). In consideration
that the situation of the external and internal banking environment is experiencing rapid development
which will be followed by increasingly complex risks for banking business activities, the increasing
complexity of risks for banking business activities can increase the need for good governance practices
and the functions of identification, measurement, monitoring, and control of bank risk. The improvement
of the functions of identification, measurement, monitoring, and risk control is intended so that the
business activities carried out by the bank do not cause losses that exceed the bank's ability or that can
disrupt the bank's business continuity. The management of each functional activity of the bank must be
integrated as much as possible into an accurate and comprehensive risk management system and process.
In order to create preconditions and risk management infrastructure, banks are required to take
steps to prepare for the implementation of risk management, transparency is one aspect that needs to be
considered in controlling the risks faced by banks. Thus, improving the quality of risk management
implementation will support the effectiveness of the risk-based bank supervision framework.
The existence of Risk Management is very important in the banking world. There are failures that
have occurred in the banking world in Indonesia due to failure to implement risk management, such as the
risks that have occurred in the 1997 monetary crisis when some experienced business failures which were
eventually liquidated.
The inability of the bank to pay its obligations can destroy not only the bank's shareholders, but
also destroy third parties who place funds in the bank, this is an insolvency risk that comes from a drastic
decline in the value of bank assets which causes a decrease in bank capital that is unable to offset it
(Masyud Ali, 2004: 28). Therefore, it is necessary to be serious and consistent in conducting risk
management for banks in Indonesia. The seriousness of this matter is what underlies Bank Indonesia as a
monetary authority that has the task of regulating and supervising banks, establishing legal products
related to risk management (Ferry N. Idroes, 2006: 52-53). Bank business activities are always faced with
risks, especially risks in lending that have a significant impact on the continuity of the bank's business.
1.1 Problem Formulation:
Based on the background stated, the problem is:
c. How is risk management applied to banking lending as the bank's prudential principle?
d. What are the obstacles in implementing Banking risk management?
1.2 Purpose
c. To analyze the application of risk management in banking lending as a prudential principle of banks.
d. To find out the obstacles in implementing Banking risk management
2.0 Literature Review:
C. Bank Prudential Principles on Banking Credit Agreements.
Banking plays a very important role as a financial institution that provides credit, credit is the main
business activity of banks. The term credit itself comes from the Roman credere which means trust or
credo or creditum which means I believe. So someone who gets credit is someone who has gained the
trust of the creditor (Mariam Darns Badrulzaman, 1983: 21). Based on the general provisions of Article 1
paragraph 11 of Law Number 7 of 1992 as amended by Law Number 10 of 1998 concerning Banking,
what is meant by credit is: "Credit is the provision of money or bills that can be equated with it, based on
an agreement or loan and borrowing agreement between a bank and another party that requires the
borrower to repay his debt after a certain period of time with interest". The essence of granting credit by
banks is due to trust after an in-depth analysis of the good faith and ability and ability of prospective
debtors to repay their debts in accordance with what is promised.
Giving credit means giving trust to the debtor by the creditor even though this trust carries a high
risk, from the description above, the elements contained in the credit can be found, namely (Hasanuddin
Rahman, 1995: 107):
a. Trust, which is the confidence of the credit provider that the credit will be received back within the
agreed period.
b. Time, namely the period between the credit granting period and the credit repayment period, means
that the value of money at the time of granting credit is higher than the value of money that will be
received at the time of returning credit in the future.
c. Degree of Risk, namely the level of risk that will be faced as a period of time that separates the
granting of credit and the return of credit means that the higher the level of risk, because there is an
element of this risk, a credit agreement needs a guarantee.
d. The achievement given is an achievement that can be in the form of goods services or money. In the
development of credit in the modern world, what is meant by achievement in granting credit is
money.
The purpose of prudence is none other than for the bank to always be in a healthy condition, in
other words, to always be liquid and solvent. Through the application of the precautionary principle, it is
hoped that the level of public trust in banks will remain high, so that people are willing and do not
hesitate to deposit their funds in banks.
The obligation to apply the precautionary principle, especially in granting credit, is stated in Article
8 (1) of the Banking Law, namely: "In providing credit or financing based on Sharia Principles,
Commercial Banks are obliged to have confidence based on in-depth analysis or the intention and ability
and ability of the debtor customer to pay off his debts or return the financing in accordance with the
agreement ", Furthermore, the explanation of Article 8 paragraph (1) is: "Credit or financing based on
Sharia Principles provided by banks carries risk, so that in its implementation banks must pay attention to
the principles of credit or financing based on sound Sharia Principles. To reduce this risk, the guarantee of
granting credit or financing based on Sharia Principles in the sense of confidence in the ability and ability
of the debtor customer to pay off its obligations in accordance with the agreement is an important factor
that must be considered by the bank. To obtain this confidence, before granting credit, the bank must
conduct a careful assessment of the character, ability, capital, collateral, business prospects of the debtor
customer."
As Article 8 of the Banking Law states that before providing credit, banks must conduct a careful
assessment, considering that the source of credit funds channeled is not funds from the bank itself, but
funds originating from the public so it is necessary to apply the prudential principle through accurate and
in-depth analysis, distribution that is right on target and meets legal requirements, binding collateral that
is juridically formal in accordance with legal and statutory provisions on collateral, good supervision and
monitoring, legal agreements and regular and complete credit documentation. Everything is intended so
that the distributed credit can be returned on time in accordance with the credit agreement including
principal and interest loans.
The basis for granting healthy credit, in the practice of granting credit, banks are required to assess
various aspects, using the principle of prudence known as prudential banking principles which are
implemented with The Five C's of Credit Analysis (5 C principles), based on the Explanation of Article 8
of the Banking Law, including:
1. The character of the debtor (character), the character or personality of the debtor is an important
element in granting credit, what is meant by character is the good personality of the prospective
debtor, namely those who always keep their promises and try to prevent despicable acts, such
debtors are able to return credit as promised. The ability of the prospective debtor (capacity), in
managing his business, must be known with certainty by the bank from his management
capabilities and human resources, whether he is able to produce well, which can be seen from his
production capacity.
2. Debtor's capital (Capital), to obtain credit, prospective debtors must have capital first, the amount
and structure of the prospective debtor's capital must be researched and the level of ratio and
solvency known.Bank cannot provide credit to entrepreneurs without any capital at all. The capital
and financial capacity of the debtor will have a direct correlation with the level of ability to pay
credit (Mahmoedin, 1995).
3. Collateral Collateral in banking terms is called a collateral object. Collateral is usually defined as
the debtor's property that is used as collateral for his debt. Credit is always overshadowed by risk,
just in case this risk arises, a fortress is needed to save, namely collateral as a means of
safeguarding against risks that may arise from customer breaches in the future.
4. Economic conditions (condition of economy), conditions or situations that have a positive impact
on the prospective debtor's business or as stated in the explanation of Article 8 of the Banking Law,
namely the relationship between macroeconomic factors and product risk. General economic
conditions and conditions in the credit applicant's business sector need attention from the bank to
minimize the risks that may arise due to economic conditions.
5. The good character of a morally honest person can be trusted and is able to manage a company
which can be seen from his management ability, whether he is able to produce well seen from his
production capacity. The assessment of a person's capacity is based on experience in the business
world linked to education as well as the strength of the company and the ability to adjust to
technological developments. The capital and financial capacity of the debtor has a direct correlation
with the level of ability to pay.
In addition to the 5 C analysis as an implementation of the prudential principle in granting credit is the 7P
principle, including (Kasmir, 2000):
1. Personality, namely the assessment of customers in terms of their personality or daily and past
behavior. Personality also includes attitudes, emotions, behavior and customer actions in dealing
with a problem.
2. Parties, namely classifying customers into certain classifications or certain groups based on capital,
loyalty and character, so that customers can be classified into certain groups and will get different
facilities from banks.
3. Purpose, meaning the analysis of the purpose of using credit that has been submitted by
prospective debtors. The purpose of taking credit can vary, for example for working capital or
investment, and so on.
4. Prospect, which is to assess whether the customer's future business is profitable or not, in other
words, has prospects or vice versa, this is important considering that if a credit facility is financed
without having prospects, it is not only the bank that loses but also the customer.
5. Payment, meaning the source of payment of the prospective debtor, this is a measure of how the
customer returns the credit that has been taken or from which sources the funds for credit
repayment. The more sources of income the debtor has, the better, so that if one of his businesses
loses money, it will be covered by other sectors.
6. Profitability, which is an assessment of the prospective debit's ability to make a profit in its
business. Profitability is tracked from pei'iode whether it will remain the same or increase,
especially with additional credit to be obtained.
7. Protection. (protectiori) is an analysis of the means of protection for creditors. The aim is to ensure
that the business and collateral are protected, which can be in the form of collateral, goods or
people or insurance coverage.
D. Regulation on the Implementation of Risk Management for Commercial Banks:
After the regulation and supervision of banks shifted to the Financial Services Authority since
December 31, 2013, as mandated by Law No. 21/2011 on the Financial Services Authority (OJK). The
regulation and supervision of banks is carried out by OJK, thus BI will focus on controlling inflation and
monetary stability. In increasing the supervisory function of the OJK banking sector, it plans to conduct
risk management compliance, which then resulted in the issuance of the Financial Services Authority
Regulation No. 18 /POJK.03/2016 concerning Risk Management Implementation for Commercial Banks.
With the enactment of this POJK, the PBI regarding risk management is no longer valid. Meanwhile,
what is meant by Risk Management in Article 1 point 3 of the POJK regarding Risk Management is a
series of procedures, and methodologies used to identify, measure, monitor and control risks arising from
bank business activities.
In the business world, risk is always there, there is no business without risk, so every time you have
to be able to bear risk, by minimizing risk. Risk is not simply avoided but must be faced in ways that can
minimize the possibility of a loss. Banks that have a high size and complexity of usalra must implement
Risk Management for all of their business activities risk categories, namely Credit Risk, Market Risk,
Liquidity Risk, Operational Risk, Compliance Risk, Legal Risk, Reputation Risk, and Strategic Risk.
Basically, the types of risks faced by banks can be divided into 2 (two) major groups, namely
(Kasmir, 2000):
3. Financial Risk
Financial risks are related to direct losses in the form of loss of money due to risks that occur, such risks
include operational risk, legal risk, credit risk, liquidity risk, reputation risk and market risk.
4. Non-Financial Risk
Non-financial risks are related to losses that cannot be clearly calculated the amount of money lost. The
financial impact of non-financial risks is not immediately felt and cannot directly make the bank
profitable, but in turn non-financial risks have the potential to cause financial losses, such risks include
reputation risk, compliance risk and strategic risk.
3.0 Results and Discussion:
C. Implementation of Risk Management in Banking Lending as a Precautionary Principle of
Banks:
The Bank's business activities are always faced with risks that are closely related to its function as
a financial intermediary institution, especially the risk in providing credit which has a significant impact
on the continuity of the bank's business. The rapid development of the external and internal banking
environment has also led to the increasing complexity of the risks of banking business activities.
Therefore, in order to be able to adapt to the banking business environment, the Bank is required to
implement Risk Management.
Through the implementation of Risk Management, the Bank is expected to better measure and
control the risks faced in conducting its business activities. Furthermore, the implementation of Risk
Management by banks will support the effectiveness of the Risk-based Bank supervision framework
conducted by the Financial Services Authority. Efforts to implement Risk Management are not only
intended for the interests of the Bank but also for the interests of customers. One important aspect in
protecting the interests of customers and in the context of risk control is the transparency of information
related to the Bank's products or activities.
The implementation of Risk Management may vary from one Bank to another in accordance with
the objectives, business policies, size and complexity of the business, financial capabilities, supporting
infrastructure and human resource capabilities. The Financial Services Authority establishes this
provision as a minimum standard that must be met by Indonesian banks in implementing Risk
Management. With this provision, the Bank is expected to be able to carry out all its activities in an
integrated manner in an accurate and comprehensive risk management system, especially in the
implementation of Risk Management.
the bank's business activities in channeling funds through credit.
The provision of credit by banks to customers is due to trust after an in-depth and thorough
analysis of the good faith and ability and ability of prospective debtors to repay their debts in accordance
with the agreement. Lending means giving trust to the debtor by the bank even though this trust carries a
high risk. Every bank lending must pay attention to the principles of prudence and sound banking
principles, both internally and externally. Externally, before a bank credit agreement is made, the bank
always conducts an assessment from various aspects, by applying the provisions of Article 8 and its
explanation in the Banking Law, the bank must have confidence in the debtor's ability to return credit on
time, as agreed.
Banking practice before extending credit assesses five aspects to the debtor or what is known as
The Five C's of Credit Analysis (5C analysis), namely: character, character or personality of the debtor is
an important element in granting credit, what is meant by character is the good, honest personal nature of
prospective debtors, namely those who always keep their promises and try to prevent despicable acts, and
have a sense of responsibility. In this case, it is necessary for the accuracy and accuracy of the credit
analysis to examine the curriculum vitae of the prospective debtor, how the reputation is in the business
environment. Capacity, the target point for assessing debtors is the ability to control the business when
the economy is sluggish. Future business prospects, production and marketing, as well as raw materials,
work equipment, financial administration, and even the ability to win the market are also assessed by the
bank. The next aspect is Capital, to obtain credit the prospective debtor must have capital first, the
amount and structure of the prospective debtor's capital must be researched and the level of ratio and
solvency known. Banks cannot provide credit to entrepreneurs without any capital at all. Collateral,
collateral is usually defined as the debtor's property that is used as collateral for his debts. Given that
credit is always overshadowed by risk, to anticipate the emergence of this risk, collateral is needed as a
means of safeguarding the risks that may arise from the customer's promise in the future. And Condition
of economy, conditions or situations that have a positive impact on the prospective debtor's business or as
stated in the explanation of Article 8 of the Banking Law, namely the relationship between
macroeconomic factors and product risk. General economic conditions and conditions in the credit
applicant's business sector need attention from the bank to minimize the risks that may arise due to
economic conditions. These conditions can be affected by the social, political and economic conditions of
a certain period and estimates that will occur in the future.
Internally, the implementation of the prudential principle for banks is the bank's Human Resources
(HR) by applying the Principles of Banking Risk Management. Indonesian banking continues to
experience significant changes in shape and character. Banking authority policies, competitive pressures
in the banking and financial markets as well as the increasingly dynamic demands for business
performance and efficiency from stakeholders cause banks to be managed proactively against business
conditions and potential.
The Bank must implement Risk Management effectively, both for the Bank individually and for
the Bank on a consolidated basis with its subsidiaries. Conventional Commercial Banks implement Risk
Management covering 8 risks, namely credit risk, market risk, liquidity risk, operational risk, legal risk,
reputation risk, strategic risk, and compliance risk. Meanwhile, Islamic banking business activities are
inseparable from risks that can disrupt the continuity of the bank, and to manage these risks must
implement risk management individually and on a consolidated basis in accordance with Islamic banking
business activities. The implementation of Risk Management in Islamic banking is adjusted to the
objectives, business policies, size, and complexity of the business and the ability of the Bank. Based on
Financial Services Authority Regulation Number 65/POJK.03/2016 concerning the implementation of
risk management for Islamic commercial banks and Islamic business units, including credit risk, market
risk, liquidity risk, operational risk, legal risk, reputation risk, strategic risk, compliance risk, rate of
return risk and equity investment risk.
The scope of Risk Management implementation at least includes, among others, active supervision
of the Board of Directors and the Board of Commissioners, which is the main line of defense to ensure
that the bank they lead is running healthily and complies with all applicable laws and regulations. In order
to carry out its authority and responsibility, the Board of Directors must have an adequate understanding
of the risks inherent in all functional activities of the Bank and be able to take the necessary actions in
accordance with the Bank's risk profile.
Furthermore, the adequacy of Risk Management policies and procedures as well as the
establishment of Risk limits, at least contains, the determination of risks associated with banking products
and transactions, the determination of the use of measurement methods and Risk Management
information systems, the determination of limits and the establishment of Risk tolerance, the
determination of Risk rating assessments, the preparation of contingency plans in the worst case scenario
؛dna the establishment of an internal control system in the implementation of Risk Management.
Meanwhile, Risk Management procedures and the determination of Risk limits must be adjusted to the
level of Risk to be taken (risk appetite) of the Bank's Risk.
In fulfilling the adequacy of the identification process, banks need to collect and accumulate data
on events, including losses that have occurred in the past, in other words based on the bank's loss
experience that has occurred. Risk measurement and monitoring banks need to establish risk objectives
that are seen from the level of likelihood of occurrence and the impact of the assessed risk. Monitoring
risk limits is not only aimed at transactions that exceed limits or activities that deviate from established
policy lines. The Risk Management information system and internal risk control are effective in the
implementation of business and operational activities at all levels of the Bank's organization, and are able
to appropriately manage the risk of the Bank time to detect weaknesses and deviations that occur.
Risk categories related to the distribution of funds through credit include credit risk. The potential
for borrowers or debtor customers to fail is related to the ability to fulfill their obligations in accordance
with the agreement in the credit agreement. This risk is caused by the debtor failing to carry out the
contents of the credit agreement, failing to select prospective debtors in the process of granting credit.
Bank human resources are fooled by the appearance of prospective debtors, in this case the importance of
applying the 5 C principle. For most banks, lending is the largest source of credit risk, the high and low
credit risk is influenced by several factors including credit concentration, counterparty credit risk, and
settlement risk. Credit concentration risk is a risk arising from the concentration of the provision of funds
to 1 (one) party or a group of parties, industry, sector, and / or certain geographic areas that have the
potential to cause substantial losses that can threaten the Bank's business continuity. Counterparty credit
risk is a risk arising from the failure of a counterparty to fulfill its obligations and arises from types of
transactions that have certain characteristics, for example transactions that are affected by movements in
fair value or market value. Settlement risk is the risk arising from the failure to deliver cash and/or
financial instruments on the agreed settlement date of the sale and/or purchase of financial instruments.
Other factors include the quality of credit analysts and the decision-making process, which is
usually linked to insiders, monitoring of the use of credit by debtors, the quality of collateral binding and
overall economic conditions. This risk must be understood, measured and identified before a facility is
provided to a debtor customer. For this reason, it is necessary to assess prospective debtor customers on
the following matters: the character and reputation of the debtor in the market, ownership and good
management, the colateral provided by the debtor meets the binding requirements of the guarantee and
the economic conditions that occur at the time of granting the facility such as competition, the type of
product managed by the debtor customer.
Another risk associated with the distribution of funds through credit is Legal Risk, exposure
arising from weaknesses in juridical aspects, among others due to lawsuits, the absence of supporting
legislation, changes in laws and external regulations that have a negative impact on operational
capabilities. Weakness of engagement such as not fulfilling the legal requirements of an agreement or
imperfect collateral binding.
The next risk is related to the distribution of funds through credit Operational Risk, which is the
risk arising from the inadequacy or malfunction of internal processes, human error or fraud, system
failure in recording, accounting and reporting transactions completely, correctly and on time, failure to
comply with internal regulations and applicable regulations, external problems such as changes in
regulations or external events that affect the Bank's operations. Furthermore, Reputation Risk arises,
among others, due to media coverage or publications and rumors regarding the Bank's business activities.
The bank's communication strategy is not effective. Negative public opinion of the bank's operations,
resulting in a decrease in the number of customers of the bank or incurring large costs due to litigation or
a decrease in the bank's income.
D. Obstacles in Implementing Banking Risk Management:
Risk is always present in the business world, there is no business without risk, in running a Business
activities at all times must be able to bear risks, so it is necessary to find ways to minimize a risk.
Especially banking in Indonesia, where the business carried out by the bank does not cause losses that
exceed the bank's ability or do not interfere with the bank's business continuity.
The existence of Risk Management is very important in the banking world. The essence of
implementing risk management is the adequacy of risk management procedures and methodologies so
that the bank's business activities can still be controlled at an acceptable limit and benefit the bank. Given
the differences in market conditions and the structure, size and complexity of the bank's business, there is
no one universal risk management system for all banks so that each bank must build a risk management
system in accordance with the risk management function and organization at the bank.
Efforts to improve the quality of risk management implementation are not only intended for the
Bank's interests but also for the interests of customers. One important aspect in protecting the interests of
customers and in the context of risk control is the transparency of information related to the Bank's
products or activities. In addition, improving the quality of risk management implementation is expected
to support the effectiveness of the risk-based bank supervision framework.
Banks are required to implement risk management in order to adapt to the banking business
environment. Risk management arrangements based on POJK No. 18
/POJK.03/2016 concerning the Implementation of Risk Management for Commercial Banks, is a
minimum standard that must be met by Indonesian banks in implementing risk management, guidelines to
be able to operate more prudently within the scope of the rapid development of business activities and
banking operations.
The implementation of Risk Management may vary from one Bank to another in accordance with
the objectives, business policies, size and complexity of the business, financial capability, supporting
infrastructure and human resource capability. However, there are still some obstacles in the
implementation of risk management, among others, during the transition period for banks that have not
adjusted their risk management policies to be fully in line with the provisions on the implementation of
risk management. In addition, human resources involved in monitoring the implementation of risk
management are still relatively unprepared. The qualifications of human resources that are not yet clear
for each level of positions related to the implementation of Risk Management, the absence of sufficient
quantity and quality of human resources in the Bank and ensuring that these human resources understand
their duties and responsibilities, both for business units, Work Units, and other units.
Risk Management and supporting units responsible for the implementation of Risk Management, so that
the internal control process in the bank is not in accordance with the guidelines for implementing banking
risk management.
For national banks, it is indeed difficult to implement Basel II, but it is a necessity for national
banks to follow international regulations. Given the function of banking as an intermediary institution and
has a special function as an institution of trust is the most risky business, the existence of problems in one
bank can lead to systemic risks that can undermine other banks so that it will automatically reduce
economic activity. To prevent bad things from happening to the national banking industry, very specific
handling is needed and by applying the precautionary principle. The need to strengthen capital for
national banks, as well as prepare themselves for the fulfillment of information technology (IT) and
human resources.
4.0 Conclusions and Suggestions:
C. Conclusion
1. The implementation of risk management in banking lending as a prudent principle of the bank includes
active supervision of the Board of Directors and Board of Commissioners; adequacy of Risk Management
policies and procedures and the establishment of risk limits; adequacy of risk identification, measurement,
monitoring and control processes, as well as Risk Management information systems; and a
comprehensive intem control system. Lending is the largest source of credit risk, the high and low
credit risk is influenced by several factors including credit concentration, counterparty credit risk, and
settlement risk. Risks associated with lending are credit risk, operational risk, legal risk, and reputation
risk.
2. Constraints in the implementation of Banking risk management, among others, the human resources
involved in monitoring the implementation of risk management are still relatively unprepared. Unclear
qualifications of human resources for each level of positions related to the implementation of Risk
Management.
D. Advice:
The Bank implements Risk Management in accordance with its objectives, business policies,
business size and complexity, and capabilities. The need for employee development and training
including managerial succession plans and adequate remuneration to ensure the availability of competent
employees in the field of Risk Management. Ensure that all human resources understand the strategy, the
level of risk to be taken and the risk tolerance, the Risk Management framework established by the Board
of Directors and approved by the Board of Commissioners and can be implemented consistently in the
activities handled.
Every bank lending must pay attention to prudential principles and sound banking principles, both
internally and externally. Externally, before a bank credit agreement is made, the bank always conducts
an assessment from various aspects, by applying the provisions of Article 8 and its explanation in the
Banking Law, the bank must have confidence in the debtor's ability to return credit on time, as agreed, the
provisions regarding this guarantee materially lead to economic guarantees. Banking practices usually
assess five aspects of the debtor (the five C's analysis), namely: character, capital, capacity, condition of
economy and collateral.
The implementation of the prudential principle internally for the bank's Human Resources (HR) is
by applying the Principles of Banking Risk Management. Indonesian banking continues to experience
significant changes in shape and character. The policies of the banking authorities, competitive pressures
in the banking and financial markets as well as the increasingly dynamic demands for business
performance and efficiency from stakeholders cause banks to be managed proactively against business
conditions and potential.
The essence of risk management implementation is the adequacy of risk management procedures
and methodologies so that the bank's business activities can still be controlled at an acceptable limit and
benefit the bank. However, given the differences in market conditions and the structure, size and
complexity of the bank's business, there is no one universal risk management system for all banks so that
each bank must build a risk management system in accordance with the risk management function and
organization at the bank.
The regulation of banking risk management principles in Indonesia, through Bank Indonesia as the
Indonesian banking regulator, has provided direction regarding the commitment to risk management
through Bank Indonesia Regulation (PBI) No. 2/27/PBI/2000, dated December 15, 2000, which among
other things stipulates the obligation for banks to have risk management guidelines, clearer instructions
regarding the intended risk management framework were only delivered several years later through PBI
No. 5/8/PBI/2003 as amended by PBI No. 11/25/PBI/2009 concerning the Implementation of Risk
Management in Commercial Banks (hereinafter referred to as PBI on Risk Management). During this
٦time period, banks in Indonesia developed risk management principles and systems based on
international best practices that were adjusted to the needs of each bank.
Financial Services Authority Regulation Number 18/POJK.03/2016 concerning the Implementation
of Risk Management for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016
Number 53, Supplement to State Gazette of the Republic of Indonesia Number 5861). In consideration
that the situation of the external and internal banking environment is experiencing rapid development
which will be followed by increasingly complex risks for banking business activities, the increasing
complexity of risks for banking business activities can increase the need for good governance practices
and the functions of identification, measurement, monitoring, and control of bank risk. The improvement
of the functions of identification, measurement, monitoring, and risk control is intended so that the
business activities carried out by the bank do not cause losses that exceed the bank's ability or that can
disrupt the bank's business continuity. The management of each functional activity of the bank must be
integrated as much as possible into an accurate and comprehensive risk management system and process.
In order to create preconditions and risk management infrastructure, banks are required to take
steps to prepare for the implementation of risk management, transparency is one aspect that needs to be
considered in controlling the risks faced by banks. Thus, improving the quality of risk management
implementation will support the effectiveness of the risk-based bank supervision framework.
The existence of Risk Management is very important in the banking world. There are failures that
have occurred in the banking world in Indonesia due to failure to implement risk management, such as the
risks that have occurred in the 1997 monetary crisis when some experienced business failures which were
eventually liquidated.
The inability of the bank to pay its obligations can destroy not only the bank's shareholders, but
also destroy third parties who place funds in the bank, this is an insolvency risk that comes from a drastic
decline in the value of bank assets which causes a decrease in bank capital that is unable to offset it
(Masyud Ali, 2004: 28). Therefore, it is necessary to be serious and consistent in conducting risk
management for banks in Indonesia. The seriousness of this matter is what underlies Bank Indonesia as a
monetary authority that has the task of regulating and supervising banks, establishing legal products
related to risk management (Ferry N. Idroes, 2006: 52-53). Bank business activities are always faced with
risks, especially risks in lending that have a significant impact on the continuity of the bank's business.
1.1 Problem Formulation:
Based on the background stated, the problem is:
e. How is risk management applied to banking lending as the bank's prudential principle?
f. What are the obstacles in implementing Banking risk management?
1.2 Purpose
e. To analyze the application of risk management in banking lending as a prudential principle of banks.
f. To find out the obstacles in implementing Banking risk management
2.0 Literature Review:
A. Bank Prudential Principles on Banking Credit Agreements.
Banking plays a very important role as a financial institution that provides credit, credit is the main
business activity of banks. The term credit itself comes from the Roman credere which means trust or
credo or creditum which means I believe. So someone who gets credit is someone who has gained the
trust of the creditor (Mariam Darns Badrulzaman, 1983: 21). Based on the general provisions of Article 1
paragraph 11 of Law Number 7 of 1992 as amended by Law Number 10 of 1998 concerning Banking,
what is meant by credit is: "Credit is the provision of money or bills that can be equated with it, based on
an agreement or loan and borrowing agreement between a bank and another party that requires the
borrower to repay his debt after a certain period of time with interest". The essence of granting credit by
banks is due to trust after an in-depth analysis of the good faith and ability and ability of prospective
debtors to repay their debts in accordance with what is promised.
Giving credit means giving trust to the debtor by the creditor even though this trust carries a high
risk, from the description above, the elements contained in the credit can be found, namely (Hasanuddin
Rahman, 1995: 107):
a. Trust, which is the confidence of the credit provider that the credit will be received back within the
agreed period.
b. Time, namely the period between the credit granting period and the credit repayment period, means
that the value of money at the time of granting credit is higher than the value of money that will be
received at the time of returning credit in the future.
c. Degree of Risk, namely the level of risk that will be faced as a period of time that separates the
granting of credit and the return of credit means that the higher the level of risk, because there is an
element of this risk, a credit agreement needs a guarantee.
d. The achievement given is an achievement that can be in the form of goods services or money. In the
development of credit in the modern world, what is meant by achievement in granting credit is
money.
The purpose of prudence is none other than for the bank to always be in a healthy condition, in
other words, to always be liquid and solvent. Through the application of the precautionary principle, it is
hoped that the level of public trust in banks will remain high, so that people are willing and do not
hesitate to deposit their funds in banks.
The obligation to apply the precautionary principle, especially in granting credit, is stated in Article
8 (1) of the Banking Law, namely: "In providing credit or financing based on Sharia Principles,
Commercial Banks are obliged to have confidence based on in-depth analysis or the intention and ability
and ability of the debtor customer to pay off his debts or return the financing in accordance with the
agreement ", Furthermore, the explanation of Article 8 paragraph (1) is: "Credit or financing based on
Sharia Principles provided by banks carries risk, so that in its implementation banks must pay attention to
the principles of credit or financing based on sound Sharia Principles. To reduce this risk, the guarantee of
granting credit or financing based on Sharia Principles in the sense of confidence in the ability and ability
of the debtor customer to pay off its obligations in accordance with the agreement is an important factor
that must be considered by the bank. To obtain this confidence, before granting credit, the bank must
conduct a careful assessment of the character, ability, capital, collateral, business prospects of the debtor
customer."
As Article 8 of the Banking Law states that before providing credit, banks must conduct a careful
assessment, considering that the source of credit funds channeled is not funds from the bank itself, but
funds originating from the public so it is necessary to apply the prudential principle through accurate and
in-depth analysis, distribution that is right on target and meets legal requirements, binding collateral that
is juridically formal in accordance with legal and statutory provisions on collateral, good supervision and
monitoring, legal agreements and regular and complete credit documentation. Everything is intended so
that the distributed credit can be returned on time in accordance with the credit agreement including
principal and interest loans.
The basis for granting healthy credit, in the practice of granting credit, banks are required to assess
various aspects, using the principle of prudence known as prudential banking principles which are
implemented with The Five C's of Credit Analysis (5 C principles), based on the Explanation of Article 8
of the Banking Law, including:
1. The character of the debtor (character), the character or personality of the debtor is an important
element in granting credit, what is meant by character is the good personality of the prospective
debtor, namely those who always keep their promises and try to prevent despicable acts, such
debtors are able to return credit as promised. The ability of the prospective debtor (capacity), in
managing his business, must be known with certainty by the bank from his management
capabilities and human resources, whether he is able to produce well, which can be seen from his
production capacity.
2. Debtor's capital (Capital), to obtain credit, prospective debtors must have capital first, the amount
and structure of the prospective debtor's capital must be researched and the level of ratio and
solvency known.Bank cannot provide credit to entrepreneurs without any capital at all. The capital
and financial capacity of the debtor will have a direct correlation with the level of ability to pay
credit (Mahmoedin, 1995).
3. Collateral Collateral in banking terms is called a collateral object. Collateral is usually defined as
the debtor's property that is used as collateral for his debt. Credit is always overshadowed by risk,
just in case this risk arises, a fortress is needed to save, namely collateral as a means of
safeguarding against risks that may arise from customer breaches in the future.
4. Economic conditions (condition of economy), conditions or situations that have a positive impact
on the prospective debtor's business or as stated in the explanation of Article 8 of the Banking Law,
namely the relationship between macroeconomic factors and product risk. General economic
conditions and conditions in the credit applicant's business sector need attention from the bank to
minimize the risks that may arise due to economic conditions.
5. The good character of a morally honest person can be trusted and is able to manage a company
which can be seen from his management ability, whether he is able to produce well seen from his
production capacity. The assessment of a person's capacity is based on experience in the business
world linked to education as well as the strength of the company and the ability to adjust to
technological developments. The capital and financial capacity of the debtor has a direct correlation
with the level of ability to pay.
In addition to the 5 C analysis as an implementation of the prudential principle in granting credit is the 7P
principle, including (Kasmir, 2000):
1. Personality, namely the assessment of customers in terms of their personality or daily and past
behavior. Personality also includes attitudes, emotions, behavior and customer actions in dealing
with a problem.
2. Parties, namely classifying customers into certain classifications or certain groups based on capital,
loyalty and character, so that customers can be classified into certain groups and will get different
facilities from banks.
3. Purpose, meaning the analysis of the purpose of using credit that has been submitted by
prospective debtors. The purpose of taking credit can vary, for example for working capital or
investment, and so on.
4. Prospect, which is to assess whether the customer's future business is profitable or not, in other
words, has prospects or vice versa, this is important considering that if a credit facility is financed
without having prospects, it is not only the bank that loses but also the customer.
5. Payment, meaning the source of payment of the prospective debtor, this is a measure of how the
customer returns the credit that has been taken or from which sources the funds for credit
repayment. The more sources of income the debtor has, the better, so that if one of his businesses
loses money, it will be covered by other sectors.
6. Profitability, which is an assessment of the prospective debit's ability to make a profit in its
business. Profitability is tracked from pei'iode whether it will remain the same or increase,
especially with additional credit to be obtained.
7. Protection. (protectiori) is an analysis of the means of protection for creditors. The aim is to ensure
that the business and collateral are protected, which can be in the form of collateral, goods or
people or insurance coverage.
B. Regulation on the Implementation of Risk Management for Commercial Banks:
After the regulation and supervision of banks shifted to the Financial Services Authority since
December 31, 2013, as mandated by Law No. 21/2011 on the Financial Services Authority (OJK). The
regulation and supervision of banks is carried out by OJK, thus BI will focus on controlling inflation and
monetary stability. In increasing the supervisory function of the OJK banking sector, it plans to conduct
risk management compliance, which then resulted in the issuance of the Financial Services Authority
Regulation No. 18 /POJK.03/2016 concerning Risk Management Implementation for Commercial Banks.
With the enactment of this POJK, the PBI regarding risk management is no longer valid. Meanwhile,
what is meant by Risk Management in Article 1 point 3 of the POJK regarding Risk Management is a
series of procedures, and methodologies used to identify, measure, monitor and control risks arising from
bank business activities.
In the business world, risk is always there, there is no business without risk, so every time you have
to be able to bear risk, by minimizing risk. Risk is not simply avoided but must be faced in ways that can
minimize the possibility of a loss. Banks that have a high size and complexity of usalra must implement
Risk Management for all of their business activities risk categories, namely Credit Risk, Market Risk,
Liquidity Risk, Operational Risk, Compliance Risk, Legal Risk, Reputation Risk, and Strategic Risk.
Basically, the types of risks faced by banks can be divided into 2 (two) major groups, namely
(Kasmir, 2000):
5. Financial Risk
Financial risks are related to direct losses in the form of loss of money due to risks that occur, such risks
include operational risk, legal risk, credit risk, liquidity risk, reputation risk and market risk.
6. Non-Financial Risk
Non-financial risks are related to losses that cannot be clearly calculated the amount of money lost. The
financial impact of non-financial risks is not immediately felt and cannot directly make the bank
profitable, but in turn non-financial risks have the potential to cause financial losses, such risks include
reputation risk, compliance risk and strategic risk.
3.0 Results and Discussion:
E. Implementation of Risk Management in Banking Lending as a Precautionary Principle of
Banks:
The Bank's business activities are always faced with risks that are closely related to its function as
a financial intermediary institution, especially the risk in providing credit which has a significant impact
on the continuity of the bank's business. The rapid development of the external and internal banking
environment has also led to the increasing complexity of the risks of banking business activities.
Therefore, in order to be able to adapt to the banking business environment, the Bank is required to
implement Risk Management.
Through the implementation of Risk Management, the Bank is expected to better measure and
control the risks faced in conducting its business activities. Furthermore, the implementation of Risk
Management by banks will support the effectiveness of the Risk-based Bank supervision framework
conducted by the Financial Services Authority. Efforts to implement Risk Management are not only
intended for the interests of the Bank but also for the interests of customers. One important aspect in
protecting the interests of customers and in the context of risk control is the transparency of information
related to the Bank's products or activities.
The implementation of Risk Management may vary from one Bank to another in accordance with
the objectives, business policies, size and complexity of the business, financial capabilities, supporting
infrastructure and human resource capabilities. The Financial Services Authority establishes this
provision as a minimum standard that must be met by Indonesian banks in implementing Risk
Management. With this provision, the Bank is expected to be able to carry out all its activities in an
integrated manner in an accurate and comprehensive risk management system, especially in the
implementation of Risk Management.
the bank's business activities in channeling funds through credit.
The provision of credit by banks to customers is due to trust after an in-depth and thorough
analysis of the good faith and ability and ability of prospective debtors to repay their debts in accordance
with the agreement. Lending means giving trust to the debtor by the bank even though this trust carries a
high risk. Every bank lending must pay attention to the principles of prudence and sound banking
principles, both internally and externally. Externally, before a bank credit agreement is made, the bank
always conducts an assessment from various aspects, by applying the provisions of Article 8 and its
explanation in the Banking Law, the bank must have confidence in the debtor's ability to return credit on
time, as agreed.
Banking practice before extending credit assesses five aspects to the debtor or what is known as
The Five C's of Credit Analysis (5C analysis), namely: character, character or personality of the debtor is
an important element in granting credit, what is meant by character is the good, honest personal nature of
prospective debtors, namely those who always keep their promises and try to prevent despicable acts, and
have a sense of responsibility. In this case, it is necessary for the accuracy and accuracy of the credit
analysis to examine the curriculum vitae of the prospective debtor, how the reputation is in the business
environment. Capacity, the target point for assessing debtors is the ability to control the business when
the economy is sluggish. Future business prospects, production and marketing, as well as raw materials,
work equipment, financial administration, and even the ability to win the market are also assessed by the
bank. The next aspect is Capital, to obtain credit the prospective debtor must have capital first, the
amount and structure of the prospective debtor's capital must be researched and the level of ratio and
solvency known. Banks cannot provide credit to entrepreneurs without any capital at all. Collateral,
collateral is usually defined as the debtor's property that is used as collateral for his debts. Given that
credit is always overshadowed by risk, to anticipate the emergence of this risk, collateral is needed as a
means of safeguarding the risks that may arise from the customer's promise in the future. And Condition
of economy, conditions or situations that have a positive impact on the prospective debtor's business or as
stated in the explanation of Article 8 of the Banking Law, namely the relationship between
macroeconomic factors and product risk. General economic conditions and conditions in the credit
applicant's business sector need attention from the bank to minimize the risks that may arise due to
economic conditions. These conditions can be affected by the social, political and economic conditions of
a certain period and estimates that will occur in the future.
Internally, the implementation of the prudential principle for banks is the bank's Human Resources
(HR) by applying the Principles of Banking Risk Management. Indonesian banking continues to
experience significant changes in shape and character. Banking authority policies, competitive pressures
in the banking and financial markets as well as the increasingly dynamic demands for business
performance and efficiency from stakeholders cause banks to be managed proactively against business
conditions and potential.
The Bank must implement Risk Management effectively, both for the Bank individually and for
the Bank on a consolidated basis with its subsidiaries. Conventional Commercial Banks implement Risk
Management covering 8 risks, namely credit risk, market risk, liquidity risk, operational risk, legal risk,
reputation risk, strategic risk, and compliance risk. Meanwhile, Islamic banking business activities are
inseparable from risks that can disrupt the continuity of the bank, and to manage these risks must
implement risk management individually and on a consolidated basis in accordance with Islamic banking
business activities. The implementation of Risk Management in Islamic banking is adjusted to the
objectives, business policies, size, and complexity of the business and the ability of the Bank. Based on
Financial Services Authority Regulation Number 65/POJK.03/2016 concerning the implementation of
risk management for Islamic commercial banks and Islamic business units, including credit risk, market
risk, liquidity risk, operational risk, legal risk, reputation risk, strategic risk, compliance risk, rate of
return risk and equity investment risk.
The scope of Risk Management implementation at least includes, among others, active supervision
of the Board of Directors and the Board of Commissioners, which is the main line of defense to ensure
that the bank they lead is running healthily and complies with all applicable laws and regulations. In order
to carry out its authority and responsibility, the Board of Directors must have an adequate understanding
of the risks inherent in all functional activities of the Bank and be able to take the necessary actions in
accordance with the Bank's risk profile.
Furthermore, the adequacy of Risk Management policies and procedures as well as the
establishment of Risk limits, at least contains, the determination of risks associated with banking products
and transactions, the determination of the use of measurement methods and Risk Management
information systems, the determination of limits and the establishment of Risk tolerance, the
determination of Risk rating assessments, the preparation of contingency plans in the worst case scenario
؛dna the establishment of an internal control system in the implementation of Risk Management.
Meanwhile, Risk Management procedures and the determination of Risk limits must be adjusted to the
level of Risk to be taken (risk appetite) of the Bank's Risk.
In fulfilling the adequacy of the identification process, banks need to collect and accumulate data
on events, including losses that have occurred in the past, in other words based on the bank's loss
experience that has occurred. Risk measurement and monitoring banks need to establish risk objectives
that are seen from the level of likelihood of occurrence and the impact of the assessed risk. Monitoring
risk limits is not only aimed at transactions that exceed limits or activities that deviate from established
policy lines. The Risk Management information system and internal risk control are effective in the
implementation of business and operational activities at all levels of the Bank's organization, and are able
to appropriately manage the risk of the Bank time to detect weaknesses and deviations that occur.
Risk categories related to the distribution of funds through credit include credit risk. The potential
for borrowers or debtor customers to fail is related to the ability to fulfill their obligations in accordance
with the agreement in the credit agreement. This risk is caused by the debtor failing to carry out the
contents of the credit agreement, failing to select prospective debtors in the process of granting credit.
Bank human resources are fooled by the appearance of prospective debtors, in this case the importance of
applying the 5 C principle. For most banks, lending is the largest source of credit risk, the high and low
credit risk is influenced by several factors including credit concentration, counterparty credit risk, and
settlement risk. Credit concentration risk is a risk arising from the concentration of the provision of funds
to 1 (one) party or a group of parties, industry, sector, and / or certain geographic areas that have the
potential to cause substantial losses that can threaten the Bank's business continuity. Counterparty credit
risk is a risk arising from the failure of a counterparty to fulfill its obligations and arises from types of
transactions that have certain characteristics, for example transactions that are affected by movements in
fair value or market value. Settlement risk is the risk arising from the failure to deliver cash and/or
financial instruments on the agreed settlement date of the sale and/or purchase of financial instruments.
Other factors include the quality of credit analysts and the decision-making process, which is
usually linked to insiders, monitoring of the use of credit by debtors, the quality of collateral binding and
overall economic conditions. This risk must be understood, measured and identified before a facility is
provided to a debtor customer. For this reason, it is necessary to assess prospective debtor customers on
the following matters: the character and reputation of the debtor in the market, ownership and good
management, the colateral provided by the debtor meets the binding requirements of the guarantee and
the economic conditions that occur at the time of granting the facility such as competition, the type of
product managed by the debtor customer.
Another risk associated with the distribution of funds through credit is Legal Risk, exposure
arising from weaknesses in juridical aspects, among others due to lawsuits, the absence of supporting
legislation, changes in laws and external regulations that have a negative impact on operational
capabilities. Weakness of engagement such as not fulfilling the legal requirements of an agreement or
imperfect collateral binding.
The next risk is related to the distribution of funds through credit Operational Risk, which is the
risk arising from the inadequacy or malfunction of internal processes, human error or fraud, system
failure in recording, accounting and reporting transactions completely, correctly and on time, failure to
comply with internal regulations and applicable regulations, external problems such as changes in
regulations or external events that affect the Bank's operations. Furthermore, Reputation Risk arises,
among others, due to media coverage or publications and rumors regarding the Bank's business activities.
The bank's communication strategy is not effective. Negative public opinion of the bank's operations,
resulting in a decrease in the number of customers of the bank or incurring large costs due to litigation or
a decrease in the bank's income.
F. Obstacles in Implementing Banking Risk Management:
Risk is always present in the business world, there is no business without risk, in running a Business
activities at all times must be able to bear risks, so it is necessary to find ways to minimize a risk.
Especially banking in Indonesia, where the business carried out by the bank does not cause losses that
exceed the bank's ability or do not interfere with the bank's business continuity.
The existence of Risk Management is very important in the banking world. The essence of
implementing risk management is the adequacy of risk management procedures and methodologies so
that the bank's business activities can still be controlled at an acceptable limit and benefit the bank. Given
the differences in market conditions and the structure, size and complexity of the bank's business, there is
no one universal risk management system for all banks so that each bank must build a risk management
system in accordance with the risk management function and organization at the bank.
Efforts to improve the quality of risk management implementation are not only intended for the
Bank's interests but also for the interests of customers. One important aspect in protecting the interests of
customers and in the context of risk control is the transparency of information related to the Bank's
products or activities. In addition, improving the quality of risk management implementation is expected
to support the effectiveness of the risk-based bank supervision framework.
Banks are required to implement risk management in order to adapt to the banking business
environment. Risk management arrangements based on POJK No. 18
/POJK.03/2016 concerning the Implementation of Risk Management for Commercial Banks, is a
minimum standard that must be met by Indonesian banks in implementing risk management, guidelines to
be able to operate more prudently within the scope of the rapid development of business activities and
banking operations.
The implementation of Risk Management may vary from one Bank to another in accordance with
the objectives, business policies, size and complexity of the business, financial capability, supporting
infrastructure and human resource capability. However, there are still some obstacles in the
implementation of risk management, among others, during the transition period for banks that have not
adjusted their risk management policies to be fully in line with the provisions on the implementation of
risk management. In addition, human resources involved in monitoring the implementation of risk
management are still relatively unprepared. The qualifications of human resources that are not yet clear
for each level of positions related to the implementation of Risk Management, the absence of sufficient
quantity and quality of human resources in the Bank and ensuring that these human resources understand
their duties and responsibilities, both for business units, Work Units, and other units.
Risk Management and supporting units responsible for the implementation of Risk Management, so that
the internal control process in the bank is not in accordance with the guidelines for implementing banking
risk management.
For national banks, it is indeed difficult to implement Basel II, but it is a necessity for national
banks to follow international regulations. Given the function of banking as an intermediary institution and
has a special function as an institution of trust is the most risky business, the existence of problems in one
bank can lead to systemic risks that can undermine other banks so that it will automatically reduce
economic activity. To prevent bad things from happening to the national banking industry, very specific
handling is needed and by applying the precautionary principle. The need to strengthen capital for
national banks, as well as prepare themselves for the fulfillment of information technology (IT) and
human resources.
4.0 Conclusions and Suggestions:
E. Conclusion
1. The implementation of risk management in banking lending as a prudent principle of the bank includes
active supervision of the Board of Directors and Board of Commissioners; adequacy of Risk Management
policies and procedures and the establishment of risk limits; adequacy of risk identification, measurement,
monitoring and control processes, as well as Risk Management information systems; and a
comprehensive intem control system. Lending is the largest source of credit risk, the high and low credit
risk is influenced by several factors including credit concentration, counterparty credit risk, and
settlement risk. Risks associated with lending are credit risk, operational risk, legal risk, and reputation
risk.
2. Constraints in the implementation of Banking risk management, among others, the human resources
involved in monitoring the implementation of risk management are still relatively unprepared. Unclear
qualifications of human resources for each level of positions related to the implementation of Risk
Management.
F. Advice:
The Bank implements Risk Management in accordance with its objectives, business policies,
business size and complexity, and capabilities. The need for employee development and training
including managerial succession plans and adequate remuneration to ensure the availability of competent
employees in the field of Risk Management. Ensure that all human resources understand the strategy, the
level of risk to be taken and the risk tolerance, the Risk Management framework established by the Board
of Directors and approved by the Board of Commissioners and can be implemented consistently in the
activities handled.
