ASSESSING BANK'S SOUNDNESS AMID RISING FORECLOSED ASSETS AND ANALYTIC HIERARCHY PROCESS (AHP) STRATEGIES

• Main Author: Jefry
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/86548
• Institution: Institut Teknologi Bandung

The banking sector in Indonesia, faces the challenge of managing foreclosed assets, especially during pandemic situation. PT Bank Laju International Tbk (The Bank) has struggled to mitigate the growth of its foreclosed assets, particularly from mortgage loans. The Bank was one of the highest of 10 banks with largest volumes of foreclosed assets in 2019-2023. This increasing volume of foreclosed assets signals that Bank is accumulating a substantial amount of non-productive assets, which could affect to its financial health, by strains Bank’s balance sheet, tying up capital that could otherwise be utilized for income-generating purposes, and might threatening Bank’s overall financial soundness. The increasing foreclosed assets might also impact to NPL ratio, signalling a higher risk profile, and might inviting greater scrutiny from regulators. The current strategies employed by the Bank to address these issues, including the sale and management of foreclosed properties, appear insufficient, necessitating a re-evaluation of its approach. Understanding the relationship between the Bank’s financial indicators and the surge in foreclosed assets is crucial for crafting effective responses. Additionally, uncovering the root causes of mortgage loan defaults will inform the development of more robust preventive and corrective measures. During the study, the financial health of the Bank was assessed using the RBBR framework by evaluating key financial ratios, including the NPL, profitability, and capital adequacy. Special attention was between the rising foreclosed assets and Bank’s NPL. A Fishbone Diagram was used to investigate root causes of the increase in foreclosed assets. Factors such as customer’s condition that causing defaults, slow progress in selling foreclosed assets, and no insurance protection during economic instability were explored. This was followed with Pareto analysis to prioritize the most critical factors contributing to the issue. To propose and prioritize effective strategies for managing foreclosed assets, the study utilized the AHP, a MCDM method, which enables decision-makers to evaluate multiple alternatives based on various criteria, ensuring a systematic and data-driven approach to strategy selection. In this study, three alternatives were evaluated using AHP: - Alternative 1: Added protection for mortgages in collaboration with insurance companies in creating credit insurance products that are appropriate, affordable, and suitable to customer needs when experiencing loss of income, layoffs, or accidents. - Alternative 2: Added collaboration with various qualified property agents to support the acceleration of selling foreclosed assets as it is. - Alternative 3: collaborate with a property agent who can help carry out reasonable renovations of the foreclosed assets to speed up the sale. The criteria and sub-criteria for evaluating these strategies were derived from FGD with Bank’s officers and customers, selected based on their comprehensive experienced, knowledge, good understanding, and involvement in mortgage loans and foreclosed assets activities, also reference from Bank’s SWOT analysis, which ensuring that internal strengths, weaknesses, external opportunities, and threats were considered in the decision-making process. The result of this study showed that despite the increase in foreclosed assets, the Bank remains financially sound, with key indicators such as NPL, CAR, ROA within acceptable regulatory limits. However, the rise in foreclosed assets continues to pose a risk to long-term financial stability. The root cause analysis identified several critical factors contributing to the increase in foreclosed assets from mortgage loans. These include borrower-related issues such as income instability and job loss, slow progress in selling foreclosed assets, and no insurance protection during economic instability. AHP analysis revealed that Alternative 1 stands in first place to be prioritized, followed by Alternative 2, however between both alternatives indicates a very small difference in prioritization weight, which means that both of strategy is important to be executed and prioritized. Proposal to implement both alternatives in parallel would be the most effective strategy for the Bank, as Alternative 1 conduct as Preventive Strategy with the objective to improve Bank’s asset quality by preventing customer’s mortgage loans from becoming foreclosed assets and providing a safety net for customers, while Alternative 2 conduct as Corrective Strategy with the objective to reduce the amount of Bank’s foreclosed assets. These two strategies will become an excellent combination in improving the Bank’s condition, where currently the Bank is one of the highest banks in amount of foreclosed assets in Indonesia. Alternative 3 conduct as a complementary strategy, where renovating foreclosed assets before sale could help increase market value and facilitate quicker sales, however it’ll take longer time for the renovation itself. This study highlights the importance of a structured approach to managing foreclosed assets and preventing mortgage loans from entering default. The Bank, while financially sound, faces the risks from the accumulation of foreclosed assets, which could impact financial performance in the long term. By utilizing AHP to prioritize strategies, the Bank can adopt a balanced approach that combines the three alternatives.