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The difficult lessons of the financial crisis created awareness at Bank Mandiri of the critical need to implement prudent
banking practices based upon integrated risk management. During the merger process itself, risk management,
especially credit risk management, was a priority for the Bank’s management given the fundamental role of risk
management in the “four-eye principle” the separation of lending decisions from credit risk decisions. This
fundamental change has created a healthier and more controlled credit culture in the Bank.
In addition, in line with the commitment of the Bank’s management President Director CEO, Board of Directors,
and Board of Commissioners and in order to improve the function of risk management as a whole, the Bank
has formed a risk management unit, with responsibility for managing and mitigating credit risk, market risk and
operational risk.
Several initiatives have been adopted by the Bank to optimize the risk management function, including the
formation of the ‘Risk and Capital Committee’ RCC, which is responsible for overall risk management implementation
in Bank Mandiri. The Committee’s members comprise the Bank’s senior executives, led by the President Director
CEO. Other initiatives include the development of tools for the identification, measurement, and control of credit,
market, and operational risks in order to support the development of the Bank. These initiatives are in keeping
with Bank Indonesia’s guidelines, which are derived from a risk-based supervision approach and the Basel Accord.
We continue to enhance our risk management systems in accordance with the Basel Accord as well as Bank
Indonesia’s guidelines, in order to comply with international standards and practice for risk management implementation.
One of the key milestones in 2004 was the introduction of risk management implementation referencing Basel II.
This was a continuation and amplification of earlier risk management initiatives within the Bank. In fulfilling its
intermediary function, Bank Mandiri must also ensure adherence to prudent banking through an integrated,
measured, and controlled risk management platform. We have, therefore, formed a Basel II Compliance Committee as
the first step toward full compliance with the Basel II Accord the new Basel Capital Accord, which is in line with Bank
Indonesia’s plan for implementation of Basel II in Indonesia.
A. Long Term Benefits Of Adopting Basel II
Basel II requires an international-scale financial institution to improve and enhance its risk management. Implementing
Basel II principles as a whole is expected to engender the creation of a healthy and well-managed banking system.
Bank Mandiri will strive to implement Basel II principles that reflect prudential banking practices and support long-term
sustainable growth. The Bank is committed to establishing risk management as one of its core competences in order
to assure all stakeholders that Bank Mandiri’s growth will be prudent.
Implementation of Basel II will be done in stages, beginning with the Standard Model and followed by the Internal
Model. The preparation for Basel II covers effective practice of risk management, competent human resources, capable
information technology and data, and other supporting elements such as IFRS-based accounting standards.
B. Implementation of Basel II
Bank Mandiri has identified eight risk types - market, credit, liquidity, operational, strategic, compliance, legal,
and reputation - to address through its risk management procedures. Based upon a diagnostic review, in 2004
the Bank delineated an action plan consisting of several initiatives to close the gap between current risk management
implementation and future requirements.
In line with Bank Indonesia mandates, Bank Mandiri has initiated the implementation of three 3 pillars of Basel II;
CAR Capital Adequacy Ratio calculation, enhancement of risk management process as required by the regulator, and
implementation of transparency principles as required by the market. All of these strategic initiatives were conducted
through the formation of the Basel II Committee.
C. Credit Risk Loan Origination System
In order to strengthen the Bank’s competitiveness in originating loans, Bank Mandiri has launched a web-based
Loan Origination System LOS for Small Medium EnterprisesCommercial as a tool to standardize and
shorten loan processing time. Our SME Scoring System SMESS and Bank Mandiri Rating System BMRS serve to
more comprehensively evaluate credit risk levels.
Risk Management
The LOS SMECommercial processes loan applications from small businesses and middle commercial customers.
The system spans the entire process from loan application to account recording, and includes facilities for keying in the
required data for scoring and rating. The LOS also provides the capacity to track the progress of loan applications.
By monitoring all loan applications through the LOS implementation, the Bank can more efficiently ensure that
our service commitments are met. In addition, the loan application database is more accurate and avoids duplicate
entries.
Scoring and Rating System Bank Mandiri calculates credit risk using several parameters
including probability of default, loss given default, exposure at default and maturity via scoring and rating systems
for Consumer, Small Business, Middle Commercial and Corporate segments. These systems help to quantify
the risk level for individual debtors and to determine the appropriate interest rate risk-based pricing.
Implementation of the scoring system in the Consumer segment enabled the Bank to record significant consumer
loan growth in the past year, accompanied by a relatively low level of non-performing loans NPLs.
Portfolio Analysis and Guidelines The quality of earning assets over the past year has improved
through the application of a comprehensive risk management system. The level of NPLs in 2004 has shown an encouraging
downward trend.
One factor in controlling NPLs has been continued business expansion through a focus only on prospective sectors. Each
sector is analyzed from a portfolio view, taking into account leading, coincidence and lagging indicators to determine
the risk and return prospects for each economic sector. This analysis serves as a guideline for each business unit to plan for
further expansion. This guideline model can then be reflected in a Portfolio Guideline, which highlights three categories of
risk: Green high expected return, low risk, Yellow average expected return, average risk and Red low expected return,
high risk. Portfolio Guidelines also serve to control credit exposure for
certain segments or sectors. With the guidelines, the Bank expects to expand within any prospective sectors and to
control exposures in any non-prospective sectors.
The Bank regularly issues portfolio reports Portfolio Cockpit, Portfolio Monthly Report Portfolio Quarterly Report, which
examines the portfolio performance for the past, current and future periods. These reports can be used as references
to calculate Risk Adjusted Return on Capital RAROC and Economic Value Added EVA, which will eventually be
implemented as the basis for lending.
Portfolio analysis provides input for the Risk Capital Committee in setting the Bank’s strategy for loan expansion.
Any resulting expansion will be more focused on specified sectors in order to obtain maximum diversification of the loan
profile.
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Credit Policy Credit risk management on a transactional level is regulated
though the Bank’s credit policy and strengthened by the Four Eye principle, and has laid the foundation for a
healthy credit culture with greater objectivity and quality in decision-making. In addition, Bank Mandiri sees the
importance of monitoring and controlling credit risks after the loan has been disbursed until its final payment.
D. Market Risk Interest Rate Risk
