Credit risk inherent in almost all the provision of funds by the bank. Some examples of asset portfolios that contain credit risk, are as follows:
Credit is defined as the provision of funds or equivalent claims with it, based on an agreement the borrowing and lending between banks and other parties who require the borrower to repay the debt after a certain period of time with interest.
For most banks, credit is the largest portion of the assets or components of bank balance sheets and also the largest source of credit risk that could have a direct impact to bank capital.
Securities is generally defined as debt instruments, notes, bonds, credit securities, or any derivative thereof, or other interest or an obligation of the issuer, in the form commonly traded in capital markets and money markets.
Credit risk on securities generally indicated by the warning (rating) securities. The higher ranked securities or securities issuer ratings, the lower the credit risk inherent in these securities.
c. Non Cash Financing Loan
Non Cash Loan generally given for trade finance (trade finance) clients both foreign and domestic transactions. Non Cash Loan financing is financing provided by banks to customers of the underlying transaction and by certain documents which prove the existence of trade transactions between the customer and third parties.
Inherently, the level of credit risk in the financing of Non Cash Loan is generally high due to the complex and the processing of transactions involving multiple parties, including third-parties as well abroad. Inherent risks also include counterparty risk, country risk, operational risk and market risk. Therefore, the bank has a portfolio of Non-Cash Loanyang relatively large should have a comprehensive risk control mechanism.
d. Interbank Call Money
Interbank call money is the investment of bank funds in rupiah-denominated bank or other foreign currencies through the interbank money market and short term. Interbank call money generally performed as part of liquidity management.
Credit risk in the interbank call money arising from the possibility of counterparty bank can not make payments when due. In addition, the creditor banks also face market risk both derived from movements in interest rates and exchange rates, especially for placement in foreign currencies. For bank borrowers, emerging risks are market risk and liquidity risk due to short-term loan repayment.
Credit risk is generally mitigated through placement on the establishment of limits on the basis of the level of bank counterparty risk, ie on the basis of bank ranking, business scale, or other criteria set by bank management.
In recent developments, some banks make modifications to products that contain credit risk, which is both simple modifications such as addition or modification of certain features of the complex. To that end, bank supervisors need to always understand the characteristics of bank products or activities in order to identify the sources of credit risk and measure the significance of the contribution of products or activities of the bank’s balance sheet as a whole.