The main function of risk management is to identify all key risks, measure and manage risk position according to the Company’s policies and procedures. As one of the largest investment companies in Indonesia, the Company endeavors to strengthen its capacity in managing business risks.
Capital Risk Management
The Group’s primary objective of managing capital risk is to ensure that it maintains healthy capital ratios to support the business, sustain its going concern, in addition to maximizing shareholders’ profit through optimization of the balance of debt and equity. The Company’s capital structure consists of debts and equity shareholders of the parent entity.
The Group manages the capital structure and applies some changes according to changes in economic conditions, if needed. In order to maintain and adjust the capital structure, the Group can adjust dividends paid to shareholders, or issue new shares. There are no changes in objectives, policies and processes for capital risk management for the years ended December 31, 2016 and 2015.
The Company’s management periodically reviews the Group’s capital structure. As part of this review, the management considers the capital costs and related risks. The Group’s policy is to maintain a healthy capital structure in order to secure access to funding at a reasonable cost.
Financial Risk Management Objectives and Policies
Risk management within the Group covers all types of risks in all functional activities of the Group based on demand to stabilize between the growth of the Group’ business and risk management.
To accommodate business growth, the Group continually evaluates on a regular basis, develops and also improves the framework of integrated enterprise risk management system and a comprehensive internal control structure, in order to give management a precaution of risk potential and to take an appropriate solution to minimize the impact of the risk. The integrated enterprise risk management framework stated in the policies, procedures, transaction limits, authority and other provisions, and risk management tools, apply within the functional activities.
The implementation of risk management in the subsidiary engaging in banking industry is guided by Bank Indonesia regulation on the Application of Risk Management for Commercial Banks along with its amendments as documents from the Basel Committee on Banking Supervision, particularly the Basel Accord II concept.
The Group’s overall financial risk management objectives and policies seek to ensure that adequate financial resources are available for operation and development of its business, while managing its exposure to foreign exchange risk, interest rate risk, credit and liquidity risks. The Group operates within defined guidelines that are approved by the management.
Policies for managing each of these risks are summarized below:
1. Market Risk Management
Media industry in Indonesia continues to show a sustainable growth over the year, with the positive economic growth of the country, anchored in strong domestic consumption as well as the rise in investment profile.
Challenge in television industry is the plan to move from analog to digital, which may occur gradually until 2018. Management has realized those challenges and developments and continues to take into account the industry development in its yearly and long-term improvement in its audience share, combined with management focus on cost control to remain competitive in the industry, as well as continue to improve its technology, human resources competencies and business process.
Within the financial services industry, the consistent growth of the Indonesian Economy has amplified the income and the purchasing power of the population over time. These conditions provide opportunities for financial services firms, both in the form of consumer loan funding to qualified customers, and product offerings such as mutual funds, life insurance, and general insurance or investment opportunities to those who have adequate income.
Management realized that the impressive growth of the Indonesian economy is volatile and may weaken due to domestic factors (high inflation), both regionally and internationally. Therefore, the Company and its subsidiaries consistently monitor the market conditions.
The energy and natural resources industry may potentially face a higher market risk due to fluctuation of commodity prices and cyclical market condition. The Company and its subsidiaries continuously conduct extensive market trends analysis to understand market movements in the past and monitor market development in the short and medium term.
2. Foreign Currency Risk Management
The Group is exposed to the effect of foreign currency exchange rate fluctuation mainly because of foreign currency denominated transactions such as purchase of goods and borrowings denominated in foreign currency.
The Group manages the foreign currency risk as follows:
- The Group takes advantage of the opportunities in the market prices of other currencies (multi-currency) to cover possible risk of weakening value of the functional currency and vice versa; thus, in an economic offset, the risks of non-functional currency exchange rate movements will be mutually eliminated. Currency transactions are always done with consideration to the exchange rate favorable to the Group.
- The Group manages the risk by matching receipt and payment in each individual currency.
- MNCSV has renegotiated with several large program content vendors, where in both parties agree that for every payment of outstanding liabilities or new invoices during the licensing period will use the agreed fixed exchange rate. For the subsidiary in banking industry, limits on positions by currency are already defined. Positions are monitored on a daily basis and hedging strategies will be used to ensure positions are maintained within established limits.
3. Interest Rate Risk Management
Interest rate risk is the risk the fair value of future cash flows of a financial instrument will fluctuate because of change in market interest rates. The Group separately monitors the interest rate from subsidiaries that are in banking industry and non banking industry.
For the subsidiary in banking industry, the Group manages its interest rate risk exposure as shown by monthly interest rate yield analysis to review the actual interest rate changes for all interest rate sensitive assets and liabilities and also by repricing gap analysis which assets subtracted from liabilities that would reprice in the same period to produce the net pricing gap for the period.
The non-banking subsidiaries are exposed to the risk of changes in market interest rate relates primarily to short-term and long-term loans with floating interest rates.
The Group manages this risk by maintaining an appropriate mix of floating and fixed rate of borrowings and entering into loan agreement with parties giving lower interest rate than other banks. In addition, the Group negotiates for borrowings with flexible terms to enable it to manage the interest rate risk, the Group has a policy of obtaining a low interest financing, back to back deposit, and borrowing with a low margin of interest and also a flexible loan term, enabling the Group to pay the loan if there is a significant increase in the interest rate.
4. Credit Risk Management
Credit risk refers to the risk that counterparty defaults on its contractual obligation resulting in a loss to the Group. The Group’s credit risk is primarily attributed to its Loans; trade accounts receivable, bank deposits, short-term investments and other investment. Credit risk on bank deposits and short-term investments is considered minimal because they are placed in credit worthy financial institutions. Other investments and trade accounts receivable with third parties are entered with respected and credit worthy third parties. The Group’s exposure and its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the risk management committee annually.
Credit risk to loans, trade accounts receivable and consumer financing are the risk that the Group will incur a loss arising from its customers, clients or counterparties that fail to discharge their contractual obligations. There are no significant concentrations of credit risk. The Group manages and controls this credit risk by setting limits on amount of risk it is willing to accept for individual customers and by monitoring exposures in relation to such limits.
The Group conducts business only with recognized and creditworthy third parties. The Group’s management applies weekly and monthly trade accounts receivable aging review and collection to limit, if not eliminate credit risk. In accordance with the Group policy, long outstanding overdue trade accounts receivable from media order customers (agency) will be put on to “Hold” status.
For the subsidiary in banking industry, the Group’s lending policy is governed by prudent principles, consisting of: avoid granting of loans to debtors with high risk, speculative business purpose, avoid loan concentration on only one economic sector and thoroughly, regularly, and continuously review and evaluate the loans granted.
The Bank applies policies to mitigate credit risk, by taking collateral to secure the repayment of loan if the primary source of debtor’s payment is no longer available. Collateral types that can be used to mitigate the risk include cash, land and/or buildings, machinery, vehicles, account receivables, and inventory.
5. Liquidity Risk Management
Liquidity risk is defined as the risk when the cash flow position of the Group indicates that the short-term revenue is not enough to cover the short-term expenditures. For banking subsidiary, liquidity risk management is critical because it has a direct impact to the sustainability of the Bank, especially in the event of financial crisis. To that end, the Group seeks to ensure that the need of current funding as well as future needs can be met both in normal conditions and under stress conditions.
To the non bank subsidiaries, the Group manages its liquidity profile to service its maturing debts or to be able to finance its capital expenditure by maintaining sufficient cash and cash equivalents and the ability of funding through an adequate amount of committed credit facilities. In addition, the Group also placed funds to financial assets which can be redeemed in anytime.