Validation of the Expected Credit Loss (ECL) model is essential to ensure compliance with regulations such as POJK, PSAK, IFRS 9, and Basel II and III. This process not only supports regulatory compliance but also enhances credibility, governance, and investor confidence. The validation approach combines qualitative and quantitative assessments covering data inputs, model design, and performance. Proper implementation helps reduce bias and improve risk prediction accuracy. Additionally, validation contributes to liquidity optimization and strategic decision-making. Overall, CKPN validation serves as a key foundation for sustainable risk management.
In the current financial landscape, transparency and accuracy in credit loss reporting are key indicators of an entity’s financial soundness. With the tightening of accounting standards and regulatory oversight, the determination of reserves is no longer merely a figure on paper, but a representation of an entity’s preparedness to address future risks. A comprehensive validation of the Expected Credit Loss (ECL) model is therefore critical to ensure that the resulting projections remain relevant and reliable.
Ensuring the validity of CKPN (Allowance for Impairment Losses) is a critical step in sustainable risk management. CKPN validation is not merely a matter of regulatory compliance, but also serves as an important foundation for designing smarter and more sustainable growth strategies.
We are present as a strategic partner to support you through the following strengths:
- Accuracy and Compliance
We ensure that your CKPN model complies with regulations such as POJK No. 40/POJK.03/2019, POJK No. 1/POJK.03/2024, SEOJK No. 21/SEOJK.03/2024, as well as PSAK 71 which was subsequently amended to PSAK 109. In addition, our validation is aligned with international standards such as IFRS 9 and Basel II and Basel III, ensuring an accurate risk monitoring foundation.
- Transparansi Global dan Tata Kelola
Through validation, we support your company in adopting best practices in governance in line with high-standard Good Corporate Governance (GCG), ensuring investor confidence and internal fundamental integrity.
- Enhanced Credibility
CKPN validation provides a positive signal to business partners regarding the company’s financial stability. Compliance with regulatory standards such as OJK also helps strengthen relationships with external parties and enhance market confidence.
- Liquidity Optimization
Validasi yang tepat memastikan kontrol lebih baik atas aset likuid, memudahkan pengelolaan risiko pasar, dan memberikan fleksibilitas bagi pemegang saham dalam memanfaatkan peluang investasi di pasar global yang dinamis.
Context and Rationale
Independent validation of CKPN is key to ensuring that loss estimates reflect the actual financial condition and help companies remain compliant with stringent regulations such as POJK No. 40/POJK.03/2019, POJK No. 1/POJK.03/2024, SEOJK No. 21/SEOJK.03/2024, as well as PSAK 71 / PSAK 109. This validation ensures:
- Model Accuracy: Ensuring that loss predictions are based on valid data and accurately reflect market conditions.
- Regulatory Compliance: Ensuring that all models comply with national and international standards such as IFRS 9 as well as Basel II and Basel III, thereby reducing the risk of sanctions and ensuring audit readiness.
- Investor Confidence: With robust validation, companies can enhance investor confidence through transparent and reliable financial reporting.
- Bias Reduction: Independent validation provides an objective assessment, ensuring that the model is free from internal influences that may lead to bias or errors.
With a comprehensive approach, CKPN validation helps companies build a strong financial foundation, maintain good relationships with regulators, and optimize risk management strategies.
Scope of Application
- Risk Coverage
Validation includes a full evaluation of the related credit risks, ensuring that all loss estimates are based on accurate and validated data.
- Target Group
Financial institutions, including banks, insurance companies, and investment firms that are required to comply with IFRS 9 as well as Basel II and Basel III standards.
- Validation Frequency
Recommended to be conducted at least annually or whenever there are significant changes in regulations or methodology, to ensure ongoing compliance.
Regulatory Authorities
Provide comprehensive reports that are audit-ready for OJK and international regulatory bodies, ensuring that you are well-positioned to undergo inspections and audits.
CKPN Validation Approach Methodology
Our services offer a combination of qualitative and quantitative assessments to provide a comprehensive view as follows:
| Qualitative Validation | Quantitative Validation | |
| Model Input | Review of data sources, preparation, processing, and data quality. | Assessment of data quality metrics, outlier detection, and variable selection. |
| Segmentation | Evaluation of current credit risk management practices and key business drivers. | Analysis of default patterns, statistical testing such as Gini Coefficient, KS statistics, and PSI. |
| Model Design | Qualitative SICR assessment, evaluation of concept reasonableness: stage transfer criteria, key assumptions of PD/LGD/EAD. | Quantitative SICR assessment, definition of default, calculation of cure period, probability-weighted scenarios, lifetime/behavioural life after default. |
| Model Output and Performance | Qualitative interpretation of performance metrics, business relevance, and limitations for each objective. | Statistical testing for predictive power, discriminatory power, and model stability. |
| Model Documentation | Review of completeness of model documentation, such as data range used; modeling procedures; as well as methodology, assumptions, and limitations. | Not Applicable. |
The validation output includes a Validation Report, Validation Working Papers, as well as Formulas and Coding (if required).
How We Support Your ECL Validation
With experience in assisting companies across various aspects and levels of readiness in risk management and regulatory compliance, we can support your company’s ECL validation through:
- Evaluation of Model Completeness and Readiness
Ensuring that the ECL model complies with regulatory requirements and standards such as POJK, SEOJK, as well as international standards such as IFRS.
- Strengthening Internal Systems and Governance
Integrating Good Corporate Governance (GCG) practices into financial reporting, ensuring alignment with audit and regulatory requirements, and consistency with internal policies.
- End-to-End Validation Implementation Management
Overseeing the comprehensive implementation of the model, including coordination across teams, data readiness, and necessary adjustments based on validation results.
- Ongoing Compliance and Reporting
Ensuring that periodic financial and risk data reporting complies with regulations while maintaining transparency in communication with investors and relevant stakeholders.
