CHAPTER I INTRODUCTION

BACKGROUND
The continuing evolution of banking around the world, with its attendant complexity of activities, demands standards of good corporate governance and risk management, which all stakeholders and business partners will be able to rely on. Both of these are critical factors, which draw the attention of all investors in grading selection of their potential investment targets. Applying risk management in BNI is actually a tradition, and has been implemented since this company was first established, though in a conventional style; it has evolved in line with internal and external development conditions. In formulating and implementing its risk management policies, BNI faithfully follows to Bank Indonesia rules for general banks, as well as working in conformity with standards from the Basel committee on banking supervision (notably, the Basel accord ll concept). Managing risk in BNI covers a scope of all BNI enterprise activities, based on needs balanced between business operational functions and their risk management. When such policies and risk management are in balance, risk management will be a strategic partner for business units in achieving optimal results from company operations. In a range of risk management developments following international banking standards, BNI sustains development and expansion of management risk system frameworks and integrated internal control, making them comprehensive and able to access relevant information where potential risks exist in an early warning system, followed by implementation of appropriate steps to minimize risk effects. The risk management framework manifests in policies, procedures, transaction limits and authority, as well as through expert risk management procedures governing the scope and activities within BNI. To ensure that its procedures and policy are carried out according to these standards, continuous impartial evaluation is applied, in a timely manner, based on perceived risk parameter changes.

PROBLEM IDENTIFICATION
Implementation of an effective credit risk management requires an adequate infrastructure, such as human resources, policies and procedures, information technology, technicaltechnical a reliable measurement of credit risk including the Internal Rating System (IRS). Internal Rating System (IRS) is the most important infrastructure in the implementation of credit risk management. By this infrastructure, BNI could analyze and estimate the chance of

losses that occur because of the failure of debtors in fulfilling their obligation to the bank, and also provide a capital allocation in order to cover those losses. Beside that, IRS also applied in loan pricing model, credit limit, credit risk model, and also become the important pillar in the process of granting credit, both at the time of loan origination, monitoring, and credit rescuing. How prepare BNI on putting this important infrastructure will determine the success of implementing risk management in the company.

SCOPE OF THE PROBLEM

The definition of risk based on investopedia.com, would be defined as The chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. A high standard deviations indicates a high degree of risk. However, there are various types of risks, which are differentiated according to the source of losses, market movements or default on payment obligations of borrowers. Therefore, those types of risks are: Credit risk Liquidity risk: funding risk Interest rate risk Market risk Foreign exchange risk

Credit risk is the most important risk in banking. It is the risk of a counterparty defaulting on payment obligations. The source of credit risk could be from many could be from a variety of functional activity of banks such as credit, treasury and investment, and trade financing. How a bank selects and manages its credit risk is critically important to its performance over time; indeed, capital depletion through loan losses has been the proximate cause of most institution failures. Identifying and rating credit risk is the essential first step in managing it effectively. The credit risk management in this paper will be limited only on all risk that related with loan. As mentioned in the previous section, that this paper would like to identify more about the credit rating system that BNI have in this case IRS. However, the meaning of rating system that is as a general could be defined as Basel ll of the methods, process, controls, data collections and IT systems that support the assessment of credit risk, the assignment of internal ratings, and the quantifications of default and loss estimates.

IRS in this paper is simply interpreted as an indicator of certain numbers or symbols, which express the order of the degree of risk of loss due to credit risk as a result of the debtor, failed to pay a financial obligation to the bank (the default) under loan agreements which have been previously defined.

PROBLEM FORMULATION
Based on the identification and the scope of the problem as describe above, the problem formulation that could be determined in the several questions below: (a) What are the roles of IRS in the management of credit risk and how effective are these roles? (b) How effective are the IRS model that owned by BNI comparing with other model of credit rating based on Basel II?

METHODOLOGY

OBJECTIVE
The purposes of this paper are as follow: (1) To understand the theory of the overall of the credit risk and IRS and analyze how these theory to be implemented in BNI (2) To understand how effective does the implementation of IRS in BNI comparing with other methodology related with credit risk rating (3) Provide a suggestion and recommendation on improving the development of system in BNI, especially on the development of credit risk management which to create added value for BNI