Referring to the provisions of the Bank Indonesia 13/5/DPNP dated February 8, 2011 on Transparency of Credit Interest Rate Information Base (SBDK), stated that SBDK formed as part of efforts to enhance good governance and encourage healthy competition in the banking industry, among others through the creation of discipline of the market (market discipline) the better.
Application of regulations for the perpetrator SBDK banking becomes a challenge to be able to set lending rates are increasingly kompoetitif, safe, and remain profitable for the bank's credit activities. With the enactment SBDK components uniformly, will provide transparasnsi over burden to be borne by the debtor and the debtor's basis of considerations about the benefits, costs, and risks of the products offered by banks.
As we know that within a predetermined SBDK components include Cost of Funds for Credit (HPDK), Overhead Costs in the loan process, as well as profit margins have been defined, but do not include customers' individual risk premium (Risk Premium).
Before reviewing the risk premium in more depth, would be much better if the first menganai strengthen understanding of credit risk and the components in it. With reference to the definition of credit risk, which means that the risk posed by the failure of debtors to meet their obligations, which in this context is the debt to the bank.
Referring to the BIS Accord on capital adequacy for credit risk cover, explained that the components of the calculation of credit risk consist of:
a. The default probability of
b. Loss Goven Default
c. The default exposure at
d. Maturity Adjustment
Given the context of this discussion is to review the concepts and the simulation calculation of the risk premium, this paper will not discuss in depth about the definition and calculation of the components mentioned above. The discussion of credit risk component tersetbu can be seen in other literature that is more comprehensive in addressing the credit risk component.
In the context of the calculation of credit risk premium, credit risk components are used in determining the amount of premium to be paid in accordance with the measurement of the distribution of credit risk primarily relates to capital reserve requirements for the loans extended.
Defining Default
Benchmarks from the event of default, among others, is through a good indication of late payments of principal and interest on borrowers, causing a decline in credit quality. Indicators of impairment can be seen from various viewpoints. First, increasing the total number of days in arrears (which are usually formed into a bucket based on the days in arrears). Second, it can also be seen from the category of credit quality that have been set by Bank Indonesia, which consists of 5 (five) categories of collectibility. Third, it can also be seen from customers' financial decline that has been identified by the bank. The most practical method performed by a bank is to use the second way, which is based on the category of the collectibility of the Bank Indonesia.
Defining the default should be clearly defined by the bank as the basis for how banks will perform calculations, which is more advanced such as provisioning CKPN calculations, even the capital.
In banking practice of defining the defaults may vary depending on the appetite and the context of the calculation to be performed. For example, the default can be defined as a debtor of penuruhan rating> BBB to below BBB. It could happen AAA to BB, BBB into CC, and so on. In addition to using ratings, default can also be defined using time bucket days in arrears. For example, the default is defined by deterioration in credit quality becomes more than 90 days overdue.
Finally, the default can be defined as well as the further downgrading. Banks should be able to determine the limits of the default, if default occurs only for borrowers who migrate to the collectibility of 5 or ranging from 3 to 5 collectibility otherwise jump to default.
Sequential deconcolidated Default Rate
The other dimension in the measurement of risk is associated with time. The longer the time, the higher the level of uncertainty over the outcome to be obtained, and thus the higher the level of risk incurred. Simple questions to illustrate the above principle is, what is the air temperature at 12 o'clock tomorrow afternoon in the Square area of Bandung? Answers to these questions are not aka tone that can guarantee the truth because the next day's air temperature can be any number in the form kontinus. However, it still can be estimated by using the temperature at 12 noon today. If today's temperature is 250C, then tomorrow is not expected to be too far (lower or higher) of 250C, or maybe even exactly the same today with a temperature of 250C. Then the question is how much the temperature in the same place, at the same hour, but 1 week, 1 month, or even 1 year from today? Obviously the longer the time estimate will be more high possibility of different temperature and the temperature today, so the more difficult to estimate.
From a simple illustration above, can be seen that the level of risk has one-way relationship with the length of time estimation. For that, in the context of the risk premium calculation, the bank should be able to determine levels of risk based on any period of time there is in lending. One of the principles of risk and time relations have been discussed by Philippe Jorion (2003) that reviews the concept called Sequential Default Process.
Concept of Appropriation and Capital
In the bank's business in general, the biggest risk facing the kind of bank is sourced from credit risk. There are at least 3 (three) things that reflect this. First, the historical development of risk management for banks (Basel Accord) suggests that the accord was first compiled for credit risk, then developed further developments to other risks. Second, most contributor to risk weighted assets for capital adequacy of credit risk weighted assets are derived from considering the bank's assets is generally greater for distribution to credit. Third, the significance of the impact of the credit risk of banks is very large, this can be seen from the obligation to provide a reserve of multiple (double buffer) for mencover credit risk, ie PPAP or replaced with CKPN, and Capital. This indicates that losses due to credit risk can be a harsh blow for the health condition of a bank.
Back to the main issues in the context of this paper, namely credit risk premium, from the standpoint of statistical science, the concept of risk and uncertainty can be visualized into a probability distribution curve. This concept is known as VaR (Value at Risk). Joel Bessis (2002) describes a concept of VaR for credit risk, that does not like to market risk, credit risk curve to set up more skewed to the left. This shows that the credit risk of loss of the most frequent (mode) is a loss with a relatively small amount.
Referring to the provisions of SBDK there is a significant change when compared with the usual BLR calculation made by the bank, namely the calculation of PPAP (formerly regarded as a component of risk) are included in the calculation of Over Head Cost (OHC). With these conditions the bank should be careful in determining the risk components in order to avoid double-counting in the calculation of risk components in the price of lending rates.
Capital Cost
An investor, Mr. Money, has a $ 1 million cash. He thinks that the money he has should be able to generate profit for him, but he also thought that he was reluctant to lose money due to investment activities that will be done. Mr. Money has several investment options, among others, is to buy SBI with the assumption that the SBI has almost no risk because it is guaranteed by the government. Placement of the SBI investment will produce returns a sum of money for Mr. Money at the end of the year by 5%. From the description above can be concluded that with the placement of the risk-free portfolio, he will get a return of 5% or the risk free rate is 5%.
Other investment options for Mr. Money is by placing their funds as the capital of a commercial bank in Indonesia, such as banks. Mr. decision. Money to put the funds as capital for the banks, certainly based on various considerations. First, Mr. Money realized that the capital investment in the bank is more risky than investing in SBI. Second, Mr. Money should be aware of their right to obtain a higher return than the bank, compared with investing in SBI. In short, the rate of return from banks must be greater than 5%.
Returning to the context of the calculation of the risk premium on the price of lending rates, philosophical differences over the type of investment can be an image in determining the cost of capital, or known by the concept of risk and return.
One popular concept of risk and return is the Capital Asset Pricing Model (CAPM) described by William Sharpe (1964) and John Lintner (1965). In the viewpoint of investors, the expected return will be even greater as the magnitude of risk faced by the investment.
Application of CAPM as described above is practically more applicable to investment in capital market sector given the data needed to calculate the components are in USD (risk premium) in the formula.
In the context of banking risk premium calculation, will always remain refers to calculations based on the direction of the BIS, where in calculating the risk premium, will refer to the calculation of capital requirements. Proxy that can be used to determine the cost of capital, among others, is by referring to the expectation of return on capital held by banks is the ratio of return on equity (ROE).
Treatment Risk Premium Calculation
As stated in the applicable calculation SBDK. First, that SBDK consists of the components, the Cost of Funds for Credit (HPDK), Overhead Costs, and Margins profit. Second, SBDK not taking into account the risk premium of individual debtors.
From the description above, stated that the bank can make the determination of the risk premium for each debtor to be a component of the price of lending rates to borrowers, along with SBDK. In determining the amount of risk premium, the authors divide it into 2 (two) types of interest rates, ie, individually and collectively.
Corporate Governance
Implementation of price risk-based lending rates or risk premium in addition to the potential to create competitive advantages in terms of bank lending rates, as well as potentially pose a risk to the bank. Particularly those risks are:
a. Compliance Risk, namely the potential for non-fulfillment of the provisions of the regulator about the application of credit risk premiums. This can be caused by inappropriate methods of premium calculation and application of internal rating systems which do not meet the requirements of Bank Indonesia.
b. Strategic risk, which may occur due to inaccurate calculation of risk premiums that are not realized interest rates given to the debtor does not bring in profits for banks that Secada accumulative significant effect on the profitability of banks.
In order to mitigate the risks arising from the above, it should always be an effort, among others, with good governance for the implementation of the risk premium is calculated in terms of Policy, Methodology, and Infrastructure.
Policy
Some of the main things that must be considered in the governance of credit risk premiums, among others, in terms of the Policy, namely:
a. It is confirmed that the policy regarding the calculation of the risk premium has met all applicable regulations, especially Regulation of Bank Indonesia.
Arranged the policy on adjustment measures if the risk premium is obtained which is considered beyond the credit limit competitiveness in the banking industry.
Methodology
Some of the main things that must be considered in the governance of credit risk premiums, among others, in terms of methodology, namely:
a. Validated, both by internal and external parties to:
1. Risk premium calculation method
2. Rating valuation method for the debtor (IRBA / internal modeling)
b. Conducted review (review) to the calculation of risk premiums and the internal model at least every 1 (one) year
Conducted a comparative study (benchmark) against which assessed sukup banking practitioners competent as a reference.
Infrastructure
Some of the main things that must be considered in the governance of credit risk premiums, among others, in terms of methodology, namely:
a. Implementation of Internal Credit Rating especially web-based applications (webrating) implemented by all stakeholders involved with full commitment.
Compatibility between systems Internal Credit Rating with a Core-banking to support the Risk Management Information System for the implementation of adequate internal rating models and calculation of risk premiums.
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