RISK MANAGEMENT Laporan Tahunan 2016 PT Bank Mandiri (Persero) Tbk versi B.Inggris

PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2016 and for the year then ended Expressed in millions of Rupiah, unless otherwise stated 220

61. RISK MANAGEMENT continued

A. Credit risk continued As an effort to improve the measurement level of transactional risk to the Foreign Office, currently BMRS has implemented at Foreign Office. To support the development of Rating and Scoring model, the Bank has issued Guideline for the development of Credit Rating and Credit Scoring model, which is a complete guidance for the Bank in developing credit rating and credit scoring model. In addition, to monitor the performance of credit rating and credit scoring model, the Bank reviews the scoring and rating results conducted by Business Units. Besides, the Bank already has a guidance to set of probability of default PD to support implementation of internal rating based approach. In order to monitor rating and scoring gathered in the database, the Bank prepares Credit Scoring Review and Rating Outlook which are issued quarterly and semi-annually. The reports contain performance scoring and rating parameters based on limit Rp5,000 - Rp15,000 for middle commercial and above Rp15,000 for large commercial and corporate. The reports are useful for Business Units particularly as a reference in determining targeted customer which are good performing, so that the quality of credit expansion process will improve. As a preparation component for IRBA Internal Rating Based Approach, the Bank has developed a Rating Model that aligns with PD, LGD and EAD development model for segments according to Basel Asset Class which are Corporate, Corporate SME, Project Finance, and Basel II Risk Parameter for Retail Segment. In both measuring economic capital for credit risk and to comply with Basel II, the Bank has been developing Long Term PD, and also reviewing Exposure at Default EAD and Lost Given Default LGD model internally. The model developed by the Bank is validated internally by Risk Model Validator, which is an independent and separate unit from the model development unit. This is done to minimize analysis error in calculating credit risk, especially in calculating PD value and assigning debtor rating. Aside from Credit Rating and Scoring, another tool used by the Bank is the loan monitoring system, which identifies debtors that may potentially experience difficulty in repaying their loan obligation. The Bank conducts early warning analysis called Watch List analysis for all Corporate and Commercial loans with collectability 1 and 2 on quarterly basis. Based on the analysis, the Bank determines account strategy and actions plan to prevent NPL. The Bank also conducts Watch List analysis for Business Banking segment using individual method for debtors that have facility limit above Rp2,000 and portfolio method for debtor that have facility limit up to Rp2,000, in order to strengthen the monitoring over Business Bankings debtors. The expectation is that it could become an early warning and therefore could improve the management of NPL level of business banking debtors. At the portfolio level, risk management is conducted through an active portfolio management approach in which the Bank proactively maintains portfolio diversification to optimum levels with risk exposure within the risk appetite level decided by the Bank. The Bank implements Portfolio Guideline PG. PG consists of three items which include Industry Classification, Industry Acceptance Criteria and Industry Limit. PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2016 and for the year then ended Expressed in millions of Rupiah, unless otherwise stated 221

61. RISK MANAGEMENT continued