INGOUDE

COMPANY

CREDIT RISK
By Yoshiharu Harano - 042111233259
INGOUDE
COMPANY

INTRODUCTION
Credit Risk and
Significance
Credit risk is the possibility of loss resulting from
the borrower failing to repay the loan or fulfill
obligations in accordance with the contract.
Generally, credit risk refers to the risk that the
lender may not be able to get back the principal
and interest on the loan, thereby disrupting cash
flow and increasing collection costs.

Credit risk is becoming increasingly important

because many cases of default experienced by
domestic, multinational companies and even
countries can experience credit risk.
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QUALITATIVE ASSESSMENT
3R & 7C Principles
RETURN
In credit risk assessment, the
return refers to the profit
generated by the borrower
using the credit extended to
them. Companies that can
achieve higher returns with
manageable risks are seen as
more worthy of receiving
credit.
Repayment Capacity
The ability to repay is strongly
linked to the debtor company's
capability to settle both the
loan's principal and interest on
time. This principle is also tied
to the timeframe within which
debtor companies repay their
loans to banks. A greater
repayment capacity correlates
with reduced credit risk.
Risk Bearing Ability
Risk bearing ability (risk
tolerance) evaluates the
debtor company's capacity to
withstand the risk of failure or
uncertainty associated with
utilizing credit. This ability can
be evaluated through factors
such as the guarantees
offered (collateral), company
size, capital structure, and
various financial metrics.
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QUALITATIVE ASSESSMENT
3R & 7C Principles
Character Capacity Capital
Character shows the Capacity is the borrower's Capital is the overall financial
borrower's (debtor's) ability to pay off their debt position of the company
willingness to fulfill his obligations through managing (borrower). Financial
obligations. This desire is more their company effectively and conditions can be seen
related to the character of the efficiently. Capacity can be through financial analysis, such
borrower. Usually banks and seen through financial reports as ratio analysis. In this case,
financial institutions use debtor and the company's past banks or financial institutions
history to pay off previous performance. Repayment must pay attention to their own
debts. capacity is also included in debt composition.
capacity.
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Collateral
Collateral is an asset that is pledged as
collateral for a loan. If for some reason the
loan cannot be returned, the collateral can
be sold to cover the loan. Financial
institutions can ask for collateral whose
value exceeds the loan amount.
Constraint
Constraints are obstacles or limitations that
cause a business to not be implemented
according to plan. This obstacle has the
potential to cause difficulties for companies
to repay loans to banks.
Condition of Economy
Condition of economy is the extent to which
economic conditions will affect the ability to
repay loans. If economic conditions worsen,
the possibility of the company experiencing
financial difficulties will be higher, which
makes the possibility of the company having
difficulty paying off loans also higher.
Coverage
Coverage is the coverage of an insurance
company's ability to cover the risk of credit
problems provided. If the debtor company
fails to pay to the bank, the insurance
company will cover part of the loss. In this
way, the risks faced by banks will decrease.
 INGOUDE
COMPANY Low High
AAA

AA

QUANTITATIVE A

ASSESSMENT BBB

Rating
Risk
Company Ratings BB
*AA to BB ratings can be added
with a (+) or (-) sign after the rating B
to indicate the relative strength of
the obligor in a particular rating CCC
category.
SD

D
High Low
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COMPANY

QUANTITATIVE ASSESSMENT
Credit Scoring Model: Discriminant Model, Linear
Probability Model, Logit Probability Model
The credit scoring model is carried out for possible credit risk
(potential default) based on a certain score generated through a
mathematical model.
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QUANTITATIVE ASSESSMENT
Discriminant Model: Discriminant analysis conducted to know whether a
company is included in a certain category. (failure to pay or not)

Mathematical Model based on Altman (1968)

Z = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4
where:
X1 = Working capital/Total Assets Ratio
X2 = Retained Earnings/Total Assets Ratio Discriminant Model Cut-off Rate
X3 = EBIT/Total Assets Ratio
X4 = Capital Book Value/Total Liabilities Ratio Cut-off Z-Score Result

Not Bankrupt >2.60

Bankruptcy limit <1.10
Gray area 1.10-2.26
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QUANTITATIVE ASSESSMENT
Linear Probability Model: Used to quantify the probability of payment
failure

Estimated equation using linear regression:

Z = a + B1X1 + B2X2
where:
X1 = Working capital/Total Assets Ratio
X2 = EBIT/Total Assets Ratio
*Higher the score, lower the credit risk
*The Z-score MUST be equal to 1 (because its probability)
BUT what if the Z-score exceeds 1??
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QUANTITATIVE ASSESSMENT
Logit Probability Model: The logit model uses a binary variable approach
(dichotomy), with two choices, for example agree and disagree, go
bankrupt and not go bankrupt, and others.
Logit regression can be write as:
Logit (Y) = log (Y/(1-Y)) = a + B1X1 + B2X2
or
Y = (exp (a + B1X1 + B2X2)) / (1 + exp (a + B1X1 + B2X2)
*The result will be always in between of 0-1, and the one that has the highest result means
they have the highest possibility to NOT fail to pay
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RISK ADJUSTED RETURN ON CAPITAL

Risk adjusted return on capital (RAROC): RAROC is comparing the level of
profit with capital at risk (capital that will be affected if the debtor
experiences default). If unexpected losses occur, they will be charged to
capital so that the financial institution or creditor will “write-off” part of
their capital as a result of the loss.
Formula for RAROC:

Income From Loans per Year

RAROC =
Capital at Risk
*The result is then compared with the minimum profit level required by the bank
COMPANY ANALYSIS
PT Kimia Farma (Persero) Tbk
Credit Risk and its Management
(Based on Financial Statement Q3,
2023)
Notes on Financial Instruments and Financial
Risk Management
In the course of its operating, investing and financing activities, the Group is
exposed to the following financial risks: credit risk, liquidity risk and market
risk and define those risks as follows:
Credit Risk:
Credit risk represents risk due to the possibility that a customer will not repay all
or a portion of a receivable or will not repay in a timely manner and therefore
will cause a loss to the Group
Notes on Financial Instruments and Financial
Risk Management
The Group manages credit risk exposed from its deposits in banks and time deposits
by using banks with good reputation and ratings to mitigate financial loss through
potential failure of the banks.
In respect of credit exposures given to customers, the Group controls its
exposure to credit risk by setting its policy in approval or rejection of new
credit contracts. Compliance with the policy is monitored by the Board of
Directors. As part of the process in approval or rejection, the customer
reputation and track record is taken into consideration.
Notes on Financial Instruments and Financial
Risk Management
The Group manages credit risk exposure from its deposits with banks and receivables
by monitoring reputation, credit ratings and limiting the aggregate risk to any
individual counterparty. For banks, only independent parties with a good rating are
accepted.
The Company has the following types of financial assets that are subject to the
expected credit loss model:
Account receivables for sales;
Inventory;
Other receivables; and
Deposits
Company Response (Mitigation)
The Group applies the PSAK 71 simplified approach to measuring expected credit
losses which uses a lifetime expected loss allowance for all trade receivables and
contract assets.
To measure the expected credit losses, trade receivables and contract assets have
been grouped based on shared credit risk characteristics and the days past due. The
contract assets relate to unbilled work in progress and have substantially the same
risk characteristics as the trade receivables for the same types of contracts. The
Group has therefore concluded that the expected loss rates for trade receivables
are a reasonable approximation of the loss rates for the contract assets.
Company Response (Mitigation)
Trade receivables and contract assets are written off when there is no reasonable
expectation of recovery. Indicators that there is no reasonable expectation of
recovery include, amongst others, the failure of a debtor to engage in a repayment
plan with the group, and a failure to make contractual payments for a period of
greater than 360 days past due.
Impairment losses on trade receivables and contract assets are presented as net
impairment losses within operating profit. Subsequent recoveries of amounts
previously written off are credited against the same line item.
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