Manajemen NPL (Non Performing Loan) dan Strategy Asset Recovery

1
“ Manajemen NPL (Non
Performing Loan) dan Strategi
Assets Recovery“

Banking Experiences
BPR Fidusia Civitas

BAB I : THE PRINCIPLES OF BANKING
1. Lembaga Keuangan
2. Bank Perkreditan Rakyat
3. Produk Bank Perkreditan Rakyat
4. Bisnis Bank
5. Risiko pada Bank
THE PRINCIPLES OF BANKING FOR HEALTHY CREDIT
PORTFOLIO

BAB I :
THE PRINCIPLES OF BANKING
THE PRINCIPLES OF BANKING FOR HEALTHY CREDIT
PORTFOLIO
1

LEMBAGA KEUANGAN
ATAU
LEMBAGA KEUANGAN
BANK
BANK
LEMBAGA KEUANGAN BAGIAN DARI
BAGIAN DARI
 Asuransi
 Multi Finance
 Perusahaan sekuritas
 Perusahaan Dana Pensiun
 Dll
2

LEMBAGA KEUANGAN_Lanj..
2 kelompok Lembaga Keuangan :
1. Lembaga Keuangan Bank
 Bank Sentral
 Bank Umum
 BPR
2. Lembaga Keuangan Bukan Bank
 Pasar Modal
 Pasar Uang dan Valas
 Koperasi Simpan Pinjam
 Pegadaian
 Leasing
 Asuransi
 Dana Pensiun
3

BANKING SUPERVISOR AND RELATED SUPERVISORY
INSTITUTION
4
DEPKEU BI LPSOJK
BANK
SISTER COMPANY
(FINANCIAL INSTITUTION)
SUBSIDIARY
(FINANCIAL INSTITUTION)
MIKRO PRUDENTIAL
Forum Koordinasi Stabilitas Sistem Keuangan
MAKRO PRUDENTIAL
For Systemic Bank and
Payment System
For Deposit
Guaranteed
and Bank
Resolution
Financial
Conglomeration
&
&

Landasan Hukum UU No.7/1992 tentang Perbankan sebagaimana telah
diubah dengan UU No.10/1998.
Bank
Adalah badan usaha yang menghimpun dana dari masyarakat dalam
bentuk simpanan dan menyalurkannya kepada masyarakat dalam bentuk
kredit dan atau bentuk-bentuk lainnya dalam rangka meningkatkan taraf
hidup masyarakat.
5

Diagram Cara Kerja Bank Secara Umum
6
BANK INDONESIA/OJK
PUBLIK SEBAGAI
DEBITUR
BANK UMUM
PUBLIK SEBAGAI
NASABAH
Tabungan/deposito Penyaluran kredit
GWM
(Giro Wajib Minimum)
Bunga
Tabungan Deposito
Bunga Kredit
Net Interest Margin
(Selisih bunga kredit dengan bunga
tabungan/deposito)

BANK PERKREDITAN RAKYAT
Jenis Bank – UU No.10 tahun 1998
Bank Umum
Adalah bank yang melaksanakan kegiatan usaha secara konvensional dan
tau berdasarkan Prinsip Syariah yang dalam kegiatannya memberikan jasa
dalam lalu lintas pembayaran.
Bank Perkreditan Rakyat
Adalah bank yang melaksanakan kegiatan usaha secara konvensional atau
berdasarkan Prinsip Syariah yang dalam kegiatannya tidak memberikan jasa
dalam lalu lintas pembayaran.
7

BANK PERKREDITAN RAKYAT_Lanj..
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Struktur Banking Indonesia

BISNIS BANK
Income Statement
Net Interest Income
(NII)
Net – non Interest
Income
Gross Income
Operating expense
Operating Income
Other expense - net
Net Income
Interest Expense
Interest Income
Trading
Book
Banking
book
Other
assets
Third
Parties
Liabilities
Capital
Balance Sheet
Retained Earning
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PBI No.11/25/PBI/2009 Tanggal 1 Juli 2009-PBI No.5/8/PBI/2013 tentang Penerapan
Manajemen Risiko bagi Bank Umum (BPR 2018)
 Risiko Kredit
Adalah Risiko akibat kegagalan debitur dan/atau pihak lain dalam memenuhi kewajiban
kepada Bank. Risiko kredit pada umumnya terdapat pada seluruh aktifitas Bank yang
kinerjanya bergantung pada kinerja pihak lawan (counterparty), penerbit (issuer), atau
kinerja peminjam dana (borrower). Risiko Kredit juga dapat diakibatkan oleh
terkonsentrasinya penyediaan dana pada debitur, wilayah geografis, produk, jenis
pembiayaan, atau langganan usaha tertentu. Risiko ini lazim disebut Risiko Konsentrasi
Kredit dan wajib diperhitungkan pula dalam penilaian Risiko Inheren.
 Risiko Likuiditas
Adalah risiko akibat ketidakmampuan Bank untuk memenuhi kewajiban yang jatuh tempo
dari sumber pendanaan arus kas, dan/atau dari aset likuid berkualitas tinggi yang diagunkan,
tanpa mengganggu aktivitas dan kondisi keuangan Bank. Risiko ini disebut juga Risiko
Likuiditas Pendanaan (Funding Liquidity Risk).
RISIKO PADA BANK
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PBI No.11/25/PBI/2009 Tanggal 1 Juli 2009-PBI No.5/8/PBI/2013 tentang Penerapan
Manajemen Risiko bagi Bank Umum (BPR 2018)_Lanj..
 Risiko Operasional
Adalah risiko akibat ketidakcukupan dan/atau tidak berfungsinya proses internal, kesalahan
manusia, kegagalan sistem, dan/atau adanya kejadian eksternal yang mempengaruhi
operasional Bank. Sumber risiko ini antara lain oleh sumber daya manusia, proses, sistem,
dan kejadian eksternal.
RISIKO PADA BANK_Lanj..
16

PBI No.11/25/PBI/2009 Tanggal 1 Juli 2009-PBI No.5/8/PBI/2013 tentang Penerapan Manajemen
Risiko bagi Bank Umum (BPR 2020)
 Risiko Stratejik
Adalah risiko akibat ketidaktepatan Bank dalam mengambil keputusan dan/atau
pelaksanaan suatu keputusan stratejik serta kegagalan dalam mengantisipasi perubahan
lingkungan bisnis. Sumber risiko stratejik antara lain ditimbulkan dari kelemahan dalam
proses formulasi strategi dan ketidaktepatan dalam perumusan strategi, ketidaktepatan
Dalam implementasi strategi, dan kegagalan mengantisipasi perubahan lingkungan bisnis.
 Risiko kepatuhan
Adalah risiko yang timbul akibat Bank tidak mematuhi dan/atau tidak melaksanakan
peraturan perundang-undangan dan ketentuan yang berlaku. Sumber risiko kepatuhan antara
lain timbul karena kurangnya pemahaman atau kesadaran hukum terhadap ketentuan
maupun standar bisnis yang berlaku umum
 Risiko Reputasi
Adalah risiko akibat menurunnya tingkat kepercayaan stakeholder yang bersumber dari persepsi
negatif terhadap Bank
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PBI No.11/25/PBI/2009 Tanggal 1 Juli 2009-PBI No.5/8/PBI/2013 tentang
Penerapan Manajemen Risiko bagi Bank Umum _Lanj..
 Risiko Hukum
Adalah risiko yang timbul akibat tuntutan hukum dan/atau kelamahan aspek
yuridis. Risiko ini juga dapat timbul antara lain karena ketiadaan peraturan
perundang-undangan yang mendasari atau kelemahan perikatan, seperti tidak
dipenuhinya syarat sahnya kontrak atau agunan yang tidak memadai.
 Risiko Pasar
Adalah risiko pada posisi neraca rekening administratif termasuk transaksi
derivatif, akibat perubahan dari kondisi pasar, termasuk risiko perubahan harga
option. Risiko pasar meliputi antara lain risiko suku bunga, risiko nilai tukar,
risiko ekuitas, dan risiko komoditas. Risiko ini dapat berasal baik dari posisi
trading book maupun posisi banking book.
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Income Statement
Net Interest Income (NII)
Net – non Interest
Income
Gross Profit
Operating expense
Operating Profit
Other expense - net
Net Profit
Interest Expense
Interest IncomeTrading
Book
Banking
Book
Other
Assets
Third
Parties
Liabilities
Capital
Balance Sheet
LIQUIDITY RISK
Market
Risk
Credit
Risk
OPERATIONALRISK
LEGAL
RISK
STRATEGIC
RISK
REPUTATION
RISK
COMPLIANCE
RISK
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Chapter 1:
ESSENTIAL OF LOAN
MONITORING
CREDIT MONITORING

• What Loan Monitoring is
• The Importance of Loan Monitoring
• Loan Monitoring Process
• Loan Monitoring Tools
• Key Consideration in Loan Monitoring Set-up
TOPICS TO BE DISCUSSED

LOAN MONITORING:
All activities that banks do both internally and externally to ensure the quality
of their loan assets
 Internal Activities Regular and ad-hoc process to assess and monitor loan
quality
Regular activities –example :
- Sitevisit, at least once a year
- Client call, could be daily, weekly or monthly – depends on the nature of
relationship; trade related facilities might require Relationship Manager
to deal with the customer on daily basis while for participation in
syndicated loan would ennabless frequent interaction.
TOPICS TO BE DISCUSSED

 Internal activities – Cont‟d
Regular and ad-hoc process to assess and monitor loan quality –
Cont‟d
Ad-hoc activities – example:
- Visit a borrower when something happened, e.g. fire accident
or earthquake affecting borrowers main manufacturing sites or
werehouse
- „stress testing‟, conducted when IDR pluged significantly againts
USD or in certain industry that are under pressure (e.g. coal
mining or other commodity-based businesses)
- „what-if‟ analysis, assessing impact of regulation change (e.g.
change in CPO export tax, issuance of BI regulation – a must to
use IDR in domestic transactions, effectively 1 July 2015)
WHAT LOAN MONITORING IS_cont’d

 external activities
Activities (mainly reporting) that required to be delivered from
their borrower/customers (or related parties such as
shareholders or guarantors – in regards to the borrowing
activities
Regular activities – example:
- Submission of quarterly/semi-annually financial statements
- Submission of inventory and/or account receivable lists
- Submission of covenant compliance report
- Other report required based on facility agreement e.g. annual
appraisal report for the fixed assets financed by banks

 external activities
Ad-hoc activities – example:
- Formal/explanation of certain legal case or other material
activities from borrower (e.g. a ship/vessel being pirated
during shipment  potential impact of loss and insurance
coverage report, etc)

Why loan monitoring (process and procedure) is important?
 Regulatory Perspective
Bank has to have process and procedure (formal and
documented) to ensure the quality of loan (to continue
performing)
 The real need of loan monitoring for the bank
o Internal needs
 Bank needs to institutionalize/formalize discipline
process/activities to maintain/ensure good quality of their
loan assets
 And if the loan becomes non performing, they have
proper handling process for the remediation/recovery
THE IMPORTANCE OF LOAN MONITORING

 The real needed of loan monitoring for the bank – Cont‟d
o External Needs
 Good Governance (Good Practices), e.g.
 Ensure timely completion and submission of
financial reports (quarterly, semi-annually or
annually)
 Good maintenance and safe-guarding the company‟s
assets (which might be pledged to bank for the
facility provided)  whether it has been adequately
insured, whether it is kept in save place, wheter it is
properly recorded and etc.
THE IMPORTANCE OF LOAN
MONITORING_Cont’d

 The real needed of loan monitoring for the bank – Cont‟d
o External Needs – Cont‟d
 Financial Dicipline, e.g.
 This requires the borrowers to be prudent in their strategic
financial decision making so that they are able to at least
maintain or improve their repayment capacity
 This is largely imposed via financial ratio covenants or other
covenants the bank believes most relevant to the borrowers
business e.g.:
• Improse debt service coverage ratio  tipically for long-
term loan
• Restriction/Limination for divident payment
• Restriction for business expansion, particularly outside their
core business
MONITORING_Cont’d

Important Notes:
• The most important reason why bank needs monitoring process
and procedure is to enable prevent or act/react promptly and
appropiately before a borrower becoming non-performing.
• With monitoring process, bank is expected to be able to see the
sign of a loan to become problematic by observing „Early
Warning Signals‟ or „Flagging‟
• Eventually this will prevent or minimize potential losses from
non-performing loan
MONITORING_Cont’d

• There is incorect perception that loan monitoring is only
responsibility of back-office (e.g. checking on-timely receipt of
FS or other covenant reports)
• Actually, loan monitoring process should be
planned/conducted/anticipated since the beginning of the loan
life-cycle process i.e. since identifying opportunity of a potential
borrower
• And would continue throughout the whole loan/lending life
cycle and conducted by all part of the bank  front, middle and
back offices
LOAN MONITORING PROCESS

• E.g. of loan monitoring process identification:
o DEALING WITH SME-TYPE BORROWERS
 Assess whether financial statement could be delivered on
timely (and reliable); if this could not be guaranteed 
need alternative way-out to monitor the repayment
capability e,g. obtaining bank statement of the main
banks immediately, etc
 Consider loan structure suitable for this customer so that
bank could monitor loan disbursement usage e,g. do
trade-related product with strict documentation is
appropriate or we are comfortable with overdraft
facility?
LOAN MONITORING PROCESS _cont’d

o DEALING WITH CORPORATE/LARGE CORPOTARE/MNC
CLIENTS
 More complex business structures (e.g. involving
consolidation of various subsidiariest) might require longer
time table for FS submission
 Access to management team might be more formal ( need
banks senior officer/high level of management to contact
them)
 Some regulatory restriction (for e.g. given their status as
publicly listed company) might need to be considered.

Example activities at each front of the banks:
POSITION ROLE/ACTIVITIES
Front-Office (relationship
Manager, Trade Product or
Cash Management team)
- Client calls
- Site visit
- Facility utilisation trend, etc
- Cash routing monitoring
Middle-Office
(Analyst/Credit)
- Quarterly financial analisys & covenant testing
- Peer comparison
- Portfolio review
- Industry research, etc
Back-Office (Loan/Credit
Admin/Trade Admin)
- Daily excess or incident report  to identify borrowers that
potentially have liquidity issues or weak monitoring  RM
Should closely monitor or reminded borrowers prior to
maturity/payment date
- Security document maintenance (including other relevant
documents such as insurance policy)
- Receipt of financial and other covenant report,
- Ensure fiduciary registration of A/R or inventory security, etc

These are tools commonly used by bank to conduct loan monitoring activities,
which consist of:
 INFORMAL/NON-FORMAL
What meant is that these activities are typicaly not formalize in the facility
agreement but are the kay/crucial part of loan monitoring process;
Normal/day-to-day bank activities e.g.
o Bank Indonesia Data Base („SID‟ or „BI‟ checking)
o Client calls/Site visits
o Monthly facility utilization report (or even weekly)
o Internal tripwires/covenants (somehow customer/borrower acknowledges
this but not formalize in the agreement; gentlement agreement), e.g.
 Certain financials ratio such as current ratio, Debt/EBITDA or
Debt/Equity, depend on the necessity
 Market share information
LOAN MONITORING TOOLS

 FORMAL
o Commonly stipulated in the facility agreement between bank
and borrower:
 Convenants:
 Reporting convenant e.g. submission of FS
statement, inventory, A/R, Fixed assets, progress
report of the assets being financed
 Financial covenant e.g. financial ratios such as
DSCR, Current Ratio, Debt/EBITDA, etc that are
relevant to the nature of customers‟ business
LOAN MONITORING TOOLS_Cont’d

 FORMAL_cont‟d
 Condition precedents:
 One-time check/confirmation from the borrower prior to signing
of the facility agreement and/or disbursement to ensure validity
of the customers (e.g. business license, authorized signatories,
etc)
 Conditiond subsequent:
 Monitoring of condition that might not be able to completed
prior to signing/loan withdrawal (e.g. valuation report,
permit/license extension in progress, etc)
o Know your customer (KYC) process: regular process to update
borrowers basic information and is also used to ensure validity of the
borrowers documentation

In this modern day, bank gets some help from technology e.g. usage of debt
domain website as sharing I formation tool for borrower (particularly for
sydication loan) – see appendix 1
Important Note:
• As part of good loan monitoring practices, bank has to issue formal/written
letter if a borrower does not fulfill/meet their obligation e.g. non-compliance
to financial metrics
• This would be critical as evidence if this loan/borrower becomes
delinquent/non-performing further and proceeds to legal process
• Nonetheless, consideration (seriousness or frequency) should also be taken
given this might be very sensitive to certain customers e.g. SOEs or High
Profile Owners

Below are various factors that could be considered in setting up monitoring tools
KEY CONSIDERATIONS IN LOAN MONITORING
SET-UP
FACTORS CONSIDERATION NOTES/EXCAMPLES
Business
segment
- private/costumers
- Small medium
enterprises
(SME)
- Corporate/large
corporate (LC)
• Monitoring tools should be simples for
SMEs e.g. request for submission of
monthly bank statement-particularly their
main bank statement; it is also likely to
impose our bank as their main bank
account for day-to-day transactions with
their customers, suppliers, employees, etc
• LC customers will be requested to submit
„compliance certificate‟; Bank is to impose
maintenance of certain financial ratio

– cont‟d
SET-UP
ownership - Privately-owned
- Publycly-Listed
- State-Owned
Enterprise
- MNC‟s (Subsidiary)
• Dealing with subsidiary of an MNC might
require a bank to follow who that MNC head-
office deals with their main bank e.g
jardine/astra group has their own standart facility
agreement (format and contents/clauses) that
should be strictly followed by their bankers;
exception is possible but only to align with local
regulation e.g. dual-language in indonesia given
the prevaling law.
• Tipically it is more flexible for bank dealing with
local corporate, and further with privately-owned
company (controlled by single/family-owner
hance decision making is faster)

– cont‟d
SET-UP
Business
Complexity
- Single line of
business/industry
- Multi line of
business/industry
• Setting-up financial convenants for a single-line
of business is much easier than those with multi-
industry ones; convenants might be set at
consolidation level and/or with additional
covenant imposes at operating / the key
operating units
• E.g. at consolidation we could set limitation on
consolidated debt level (via Debt/EBITDA, etc)
while at operating we set operating covenant
such as maintenance of 30% supply to their key
buyers
Type of
Products
- Long-term loan
- Short-term loan
- Trade related products
(Structured products)
• Financial covenants are typically set for long-
term loan; if a bank provides trade-product it is
rarely financial covenant applied

– cont‟d
SET-UP
Bank
capability/exper
tise
- If bank does not
have capacity or
expertise  hire
external parties e.g.
independent
appraisal company
or expert-for
example to produce
JORC report of
mining company
• To monitor this, bank will request borrower to
appoint independent party to conduct specific
assessment regularly e.g. appraisal report of
fixed asset every 24 months or assigning
sucofindo to monitor specific inventory on daily
basis

– cont‟d
SET-UP
History/reputati
on
- The more reputable
or financilally
strong the borrower
the less
restriction/convena
nt that could be
imposed e.g. Astra
Group or Salim
Group typically on
„clean basis‟ and
minimum financial
covenant (only case
by case basis we
could impose more
covenants)
• Loan monitoring program (typically via
covenant) for company with long history and
good reputation would typically less strict and
frequent than that with short and un-proven track
record
• E.g. dealing with Salim Group companies might
require bank to only do semi-annual covenant
testing.

Chapter 2 :
EARLY WARNING SIGNALS
(TO TRIGGER LOAN
MONITORING)

 Credit Cycle
 Industry & Market Change
 Financial Information & trend
 Covenant Compliance
 Management Warning Signs
 BI Guidelines on Credit Quality
TOPICS TO BE DISSCUSSED

 There are several factors/striggers/events that could provide
‘Early Warning Signal’ or ‘ Flagging’;
 Should this signs/flags be observed, bank could act/react
promptly (e.g. increase pricing to avoid further utilization or
freeze the existing facility directly) or to intensify/tighten
monitoring activities  depend on the judgment of the severity
of the (potential) problems.
EARLY WARNING SIGNALS

EARLY WARNING SIGNALS_cont’d
FACTORS/TRIGGERS
/EVENTS
DESCRIPTION/EXAMPLE
CREDIT CYCLE
• A borrower typically has certain business/credit cycle/seasonality,
which affect the utilisation of their banking facility
• Considerable deviation from this cycle/seasonality/pattern might
„alert‟or‟flag‟ or „warn‟ the presence of borrowers liquidity
problem (although this might necessarily be the case)
• E.g. 1 or 2 months prior to fasting month (Ramadhan) a sarong
producer borrower need to build up their inventory to anticipate
higher demand for‟lebaran‟  this will lead to higher outstanding
loan as they utilise their facility to finance such inventory build
up; historically, 1-1.5 months after „lebaran‟ the facility utilisation
was lower; should high facility utilisation continued until 2-2.5
months post „lebaran‟, RM should immediately find-out what
happened and might act appropriately afterwards (e.g. could
freeze the facility, ask for daily cash report,etc)

FACTORS/TRIGGERS/E
VENTS
DESCRIPTION/EXAMPLE
INDUSTRY & MARKET
CHANGE
• News about industry  changes (or potential change) of taxes, tariffs,
import restrictions, import duties & other industry –related issues are likely
to affect your borrowers business which further affect their cash flow &
ability to repay the loan
Action; conduct portfolio review („stress - test‟ or ‟what-if‟ analysis) to
the borrower in the relevant industry
e.g. since three/two years ago until now, banks closely monitor their coal
mining (and coal mining contractor) borrowers and very selective in
providing support to these customers-event some banks has stopped
expanding to this sector and only maintain/gradually reduce their
exposures. Some banks conduct quarterly/semi-annual comprehensive
review of the coal mining borrowers financials
Recent Hot Topic: implementation of BI Regulation (PBI) No.
17/3/PBI/2015 about Mandatory Use of IDR in Financial Transaction in
Indonesia – by Effectively 1 July 2015
 Lots of confusion about this implementation
 Uncertainty about the effectiveness of any agreement made prior to 1
July 2015

FACTORS/TRIGGER
S/EVENTS
DESCRIPTION/EXAMPLE
Industry & market
change_Cont’d
• Labour issue  every year there will be review of minimum
regional wage („UMR‟); this will have considerable impact to
„labour intensive‟ industries. As such, review/sensitivity analysis
of the UMR increase impact is part of the credit proposal
• Environmental issue  this issue will impact borrower‟s going
concern as well as your bank‟s reputation; nowadays,
environmental campaign from NGO intensifies particularly for
Palm Oil Plantation
 Requirement to comply with ISPO or RSPO (more relevant
for export-oriented companies; also mostly requested by
international banks who are member of RSPO as well)
 E.g. international bank usually has a special and dedicated
team (commonly „sustainability team‟) that would screen
potential borrowers from environmental issues

FACTORS/TRIGGER
S/EVENTS
DESCRIPTION/EXAMPLE
FINANCIAL
INFORMATION &
TREND
The followings are some indicators/signs that should be observed
more carefully as this is likely warn the coming of problems to a
borrower:
• Continuing weakening financial indicators (e.g. growth, margin,
DSCR) while industry is relatively stable or event at growing
mode
• Unusual late or incomplete financial information submission 
potential bad result or borrower still „cook‟ their book so it takes
longer to publish it
• Frequent or suddent change of auditors  potential disagreement
or event dispute with auditor about the audit result of the
financials
• Un-clean audit opinion  „qualified‟, „adverse‟ or „disclaimer‟
audit opinion  potentially indicated financial problem
• Change of accounting practices  part of effort to „massage‟ their
financial result

FACTORS/TRIGGER
S/EVENTS
DESCRIPTION/EXAMPLE
FINANCIAL
INFORMATION &
TREND_cont’d
• Usual financial trend (e.g. unusual low cash balance, longer A/R or
inventory or A/P level (or days)
• Increasing debt level while business/industry is relatively stagnant
 potential cash flow side-streaming
• Rating downgrade or outlook revision by eksternal rating agency
e.g. Pefindo, S&P, moodys or Fitch ratings
Cash flow side streaming  to use borrowing money for purposes
that is not originally intendeed to
How it is done
 Inter companies borrowings (affiliated parties)
 Selling and buying that is not done with arm‟s length condition
 Devidend payment
 Placement of fund/investment in affiliated company

FACTORS/TRIGGER
S/EVENTS
DESCRIPTION/EXAMPLE
COVENANT
COMPLIANCE
• Non-compliance to the agreed covenat stated in the facility
agreement  might warn potential problem
• Frequent requests for „waiver of covenant breach‟ might be
implied as more serious problems
Example of covenant:
Affirmative Covenants
 Submissions of quarterly FS by 30 days after the period closing or
annual FS by 60 days after the year-end
 Submission of monthly A/R and / or Inventory list
Negative Covenants
 No devidend (or limited divident payment) without lenders‟
approval during borrowing period
 No merger/acquisition without lenders‟ approval
 No change of business

FACTORS/TRIGGER
S/EVENTS
DESCRIPTION/EXAMPLE
MANAGEMENT
WARNING SIGNS
Some indicators in the corporate/management that might lead to
increased risks;
• Sudden resignation of key management team e.g. CEO, CFO or
key business unit heads
• De-motivated/de-moralized employees
• Excessive dowtime/repairs of the manufacturing facilities
• Deteriorating appearance of the company (and its facilities)
• Expansion to non-core business or new business area
• Recurrence of problems/instability e.g. labour strike
• High employees turnover – especially in key positions

BI GUIDELINES ON CREDIT QUALITY
BI Regulation that provides guidance on how to access credit
quality (by looking at 3 criteria) could also be used to ‘early warn’
about a borrower’s risk profile as table below:
a. Business Prospect:
• Growth potential
• Market condition and the borrower’s market share
• Management quality and human resources issue
• Group / affiliated support; and
• Borrower effort on environmental issue

BI GUIDELINES ON CREDIT QUALITY_Cont’d
b. Debtor performance:
• Profit
• Capital structure
• Cash flow
• Market sensitivity
c. Repayment capability
• Punctuality in debt principal and interset repayment
• Accuracy on finacial information
• Completeness of credit documentation
• Compliance on credit agreement
• Suitability in the uses of loan disbursed
• Appropiate source of credit repayment

Chapter 3 :
MANAGEMENT OF NON-
PERFORMING LOAN (NPL)

1. Overview of NPL & its Management
2. Sequence of NPL Management
3. Identifying the Cause Credit Failure
4. NPL Workout/Resolution Strategy
TOPICS TO BE DISSCUSSED

 In the previous discussion, all loan monitoring efforts (process,
procedure and tolls) are exercised to avoid „non-performing loan
(NPL)‟or‟bad-debt‟.
 For various reasons, bad debt always occurs in a bank although
the severity depends on the bank‟s robustness on their loan
process throughout life-cycle (from underwriting to monitoring
stage). Should bank debt occur, bank should have a formal
process and procedure to handling that bad debt.
 The objective of bad debt management is to as far as it could
minimize losses from this bad debt. If possible, optinum
recovery is expected.
OVERVIEW OF NPL & ITS MANAGEMENT

 Typically (and as required by regulators BI and/or OJK) bad debt
should be handled by separate and independent team – handled
by those that were nit involved in granting the loan, separate
from the Relationship Manager in-charge (“RM”).
 The reason for assigning a special unit is (a) to enable RM focus
on „good-bank‟ (b) to be handled by staff with speciall skills © to
obtain „fresh‟ perspective – avoid „conflict of interest‟ if this is
hendled by those who originated the loan.
 This dedicated team usually called with various names in
different banks e.g. as „special assets management (SAM)‟,
or‟Remedial & Recovery Unit‟ or „debt Restructuring Unit‟ or „
Lending Services‟.
OVERVIEW OF NPL & ITS MANAGEMENT _ cont‟d

 Bad Debt Management Process is started by gradual involvement
of SAM team in the initial stage when a borrower is identified to
have potential becoming bed debt. Somehow this is conducted
less formally (depend on the decision of the senior management
such as Head of Business and/or Credit Risk Officer). This early
involvement is somehow called by „shadowing‟.
 Formal transfer would be done whenimminent evidence of bad
debt presents e.g financial indicators deteriorated rapidly (such as
sales or margin dropped by 30-40% in a quarter) which lead to
significant rating downgrade, repeated key covenant breach, fail
to pay interest ang/or instalment. Etc.

 Although formally transferred to SAM, RM would continue
assisting SAM team during the transition period e.g. explaining
loan origination process, development from performing to non-
performing, reviewing legal documentation, introduction and
accompanying for meeting with borrowers, etc.
 Once SAM team has the adequate knowledge about the bad debt
borrower, this would pre-dominantly handled by SAM. Careful
transition should be ensured to avoid resistanve or unnecessary
problem with the borrower – this depends on the assessment of
the various aspects of the debtor (e.g whether they are
cooperative customers, whether the problem is due to
mismanagement or industry condition, etc.

1. RM to involve SAM to shadow the potential NPL (involve largely in
internal discussion)
2. If NPL does not occur (after fulfilling some metrics/thresholds set
together by RM, credit and SAM) it would continue to be handled by
RM; if NPL evident is apparent, Sam team would start more active
management of the account (involvement in dicussion with borrower,
etc)
3. SAM would start „fact-finding‟:
- acquiring credit files
- review loan documentation, including validity of security
documents
- identifying the cause of credit failure
- introduction / meeting with clients (being accompanied by RM)
SEQUENCE OF NPL MANAGEMENT

4. Establishing & executing NPL workout/Resolution Strategy
(with approval from Senior Management).
5. If NPL resolution succerds – borrower agrees ang signs the new
facility/resolution agreement; this would be transferred back to
RM to be managed as performing loan; typically this is
conducted after borrower meets several key indicators or certain
time period or several payments made by borrower.
6. If this NPL further proceed to the legal process, SAM (together
with lwgal team or external counsel) is responsible to complete
the process.
7. SAM team to seek approval from Senior Management to „write
–of‟ or „write-back‟ – depend on the situation.
SEQUENCE OF NPL MANAGEMENT _ cont‟d

There are two main reasons for a borrower to fail meeting their
obligation to pay interest and/or installment of principal past due,
i.e external and internal factors;
• External factor due to factors beyond the control of the bank
• Internal factor bank‟s weak internal process / credit culture
IDENTIFYING CAUSE OF CREDIT FAILURE

1. EXTERNAL
a. Worsening of macro economy condition
b. Worsening industry related to Debtor‟s business
c. Debtor declining business condition, because of;
• Change of regulation
• The more rigorous level of competition
• Change of technology
• Geograpic condition or natural disaster
• Etcetera
d. Debtor has the intention of doing fraid, by falsifying
documents or providing incorrect financial data
IDENTIFYING CAUSE OF CREDIT FAILURE _ cont‟d

2. INTERNAL
a. Self Dealing, activity that is implemented for Bank
employee‟s personal interest.
b. Anxiety for Income, income that derived from credit
activity is a major income for most of the Bank, so that
Bank or Bank employee are given excessive target in order
to get big profit from credit interest income.
c. Not available or lack of adequate policies and procedures in
credit to fulfill the requirement of a good credit
management process.

2. INTERNAL _ cont‟d
d. Compromise and overly relaxation of the principle of sound
lending. Violation to principles of lending by the Bank
management who approve lending that has potential risk will
become credit problem.
e. Credit information as the basis of decision making is
incomplete.
f. Credit monitoring is not implemented consistently. Lack of
effective and continous monitoring after granting the credit
will make credit condition a loss because the customer does
not fulfill their obligation properly.

2. INTERNAL _ cont‟d
g. Trivialize or oversimplify problems occurred.
h. Bank emlpyees in credit unit have lack of adequate technical
capabilities in analyzing credit proposal in the area of
financial aspect as well as other aspects are week, so that
create failure in bank credit activities.
i. Inability to do risk selection.
j. Granting credit that is over financing.

NPL workout or resolution strategy will depend on borrower‟s
characteristics/condition. There are two borrower‟s characteristicts
that will determine the resolution strategy i.e. (a) business Prospect
ang (b) cooperativeness.
After determining borrower‟s characteristic, we would decide
resolution strategy that are broadly comprises of 2 options i.e. via
(a) Credit Rescue ang (b) Credit Settlement
NPL WORKOUT/RESOLUTION STRATEGY

Assessment of Borrower‟s Charactersistics is tabled as follow :
NPL WORKOUT/RESOLUTION STRATEGY _ Cont‟d
Prospective
• Still has collateral goods that have not been sold or
auctioned or executed them
• Still have the business or other activity that makes profit
and can be expected to complete its obligations
• Still has good faith to settle their obligations
Cooperative
• Easy to contact
• Easy to negotiate for the settlement of credit
• Transparency of the financial or business
• Willing to settle the credit by means of :
- Repayment in cash or installment
- collateral selling voluntarily (in private agreement
or auction)
Non – Prospective
• Has no collateral goods anymore
• Has no other possessions (assets)
• Has no more capability, all of the business and activities are
terminated
• Has passed away without leaving any possessions and the
heirs are deemed incapable of completing all or part of the
obligations
Non – Cooperative
• Difficult to contact
• Difficult to negotiate to settle the credit based on the bank‟s
terms
• Still have the financial capability but it is not used to lower
the credit, instead it is used for other purposes without the
approval of Banks
• Not transparent in terms of financial or business
• Stalling or delaying payment

Following understanding of Borrower‟s characteristics, here is
the alternative resolution strategy :
PROSPECTIVE NON-PROSPECTIVE
COOPERATIVE Rescue Settlement
NON-COOPERATIVE Settlement Settlement

NON-PERFORMING CREDIT RESCUE –cont‟d
 Non – Performing Credit Rescue Strategy
Credit Restructuring
Selling of collateral assets and non-collateral assets (non-
productive)
Face Out
Bank Temporary Shareholding Investment
Assets Management
Debt to Assets Swap
Debt to Convertible Bond Swap
Debt Settlement Agreement
Combining Strategies

 Credit Restructuring improvement efforts by the Bank in
credit activities for Debtors who heve difficulty to meet their
obligations.
Banks may only restructure the credit of the Debtor who meets
the following criteria‟s :
• Debtor having difficulty in paying the principal and/or
interest rate; and
• Debtor still has good business prospects and considered able
to meet its obligations after the credit was restructured

 Credit Restructuring - Cont‟d
Banks are prohibited from restructuring credit with the only
aim to :
• Improving credit quality; or
• Avoiding the increase of credit provision (for assets
impairment)
Below are categories of means of conducting credit
restructuring :
• Streching or Rescheduling
• Reconditioning
• Recapitalizing or Restructuring

 Selling of Collateral assets and non-collateral assets (non-
productive)
Collateral / non-collateral assets selling voluntarily (in private
agreement) or by auction to rapay some or all of the credit
 Face out
Credit rescue by transfering/selling credit facility to another
creditor which is usually a Bank or other financial companies
whose business activities are managing credit

 Bank Temporary Share holding Investment
Bank Temporary Investment is an equity investment by a Bank
on its Debtor to overcome the failure of credit (debt to equity
swab), including investment in the form of mandatory
convertible bonds or certain types of transaction that lead to the
banks for holding or will hold shares in a particular company
Equity investment strategy can only be done for credit that has
collectability of 3 (three) – 5 (five)

 Assets Management
Banks are granted the rights by the Debtor to manage the
collateral assets or other assets submitted by the Debtor in
which the results of the asset management becomes the source
of payment of debt to the Bank
 Debt to Asset Swap
Debt to asset swap is payment or settlement of the Debtor‟s
debt by exchanging or giving certain assets

 Debt to Convertible Bond Swap
Debt to Convertible Bond Swab is payment or settlement of Debtor‟s debt
by exchanging or issuing a type of bond that can be coverted into shares of
the issuer company and usually the exchange ratio has been determined in
advance at the time of issuance of the bonds
 Debt Settlement Agreement
Agreement made between the Debtor and the Bnak stating that debtor‟s
debts will be resolved by performing a number of payment/delivery of assets
which have been agreed between the Debtor and the Bank
 Combining Strategies
Is a combination of several strategies on the non-performing credit rescue

NON-PERFORMING CREDIT SETTLEMENT
Is the effort made to resolve non performing loans that have no
prospect after business coaching, rescue and there no other possible
ways to prevent greather losses
Requirement to settle problemed credit :
• Non – potential debtor, or
• Debtor is not cooperative

NON-PERFORMING CREDIT SETTLEMENT – Cont‟d
 Non – Performing Credit Settlement Strategy
Selling of collateral assets
Novation
Subrogation
Execution of collateral assets or auction
Suspension of Debt Payments (PKPU) and Bankruptcy
litigation

 Selling of Collateral assets
Collateral assets selling owned by debtor (in private agreement)
by using a power of attorney from the owner to sell the
Collateral must be assessed in advance to obtain the fair value
of the assets sold
Requirement to conduct collateral asset sales / liquidation :
• Debtor‟s has a good faith
• Production facility (as a collateral) still have a re-sale value
• There are interested parties/investors

 Novation
Novation ia a debt update accompanied by the abolishment of
the old engangement which is replaced with a new one.
There are two (2) forms of novation, as follows :
• Subjective Novation (subjects / parties is replaced)
• Objective Novation (objects / engangement is replaced)

 Subrogation
Reimbursement of the Bank‟s rights by third parties due to debtor‟s debt
payments by the third-party to the bank. Credit agreement between Bank
and its debtor is not abolished, as well as all the terms and condition in the
existing engangement, it remains valid & envorceable and but it transferred
to a new Creditor who make such payments.
There are two (2) types of subrogation, as follow :
• The entire Debtor‟s debt paid by another creditor and the previous
creditor hands over the entire existing credit collateral to new creditor
• Some of debtor‟s debt is taken over by other creditor (purchased loans,
joint financing, syndication, consortium) where the exixting collateral is
enganged in paripasu

 Execution of collateral assets or auction
• Execution of Collateral
Execution of collateral is conducted if the debtor no longer
have a good faith or good will or incapable of paying all of
their obligations
• Execution of guarantee and other securities
Execution of guarantee and other securities owned by
debtor can be conducted by the bank without debtor‟s
consent

 Suspension of Debt Payments (penundaan Kewajiban Pembayaran Utang/
PKPU) and Bankruptcy
• PKPU
PKPU is a debt settlement alternative to avoid bankruptcy. PKPU is a
certain period given by the law through a commercial court decision
• Bankruptcy
According to the bankruptcy act, bankruptcy is defined as a general
confiscation (sita umum) of all wealth owned by the bankrupt debtor
which the arrangement and management are conducted by a cutaror
under the supervision of the supervisory judge as provided in the act

 litigation
Ligitation is the process of resolving disputes in a court of law
where all parties to the dispute have the opportunity to file a
lawsuit and denials
Here are some ways of non-performing credit settlement by
ligitation, namely :
• Filling a lawsuit to court
Filling a lawsuit in the district court with the provisions of
the civil procedure code.

 Litigation – Cont‟d
Here are some ways of non-performing credit settlement by
ligitation, namely :
• Through the Commercial Court
For commercial court settlement, this is done by filling
bankruptcy or PKPU (The Law 2004 No. 37 Article 2 in
conjunction with Article 1131 Civil Code)
• Reporting Debtor to police
To suppress the debtor when the bank finds debtor is
conducting fictitious data in applying for credit.

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