Institutional Risk Assessment Framework (IRAF)

To ensure a cohesive and proactive monitoring of the risks the banks/DFIs are exposed to and to further strengthen the existing supervisory mechanism, State Bank of Pakistan intends to introduce a framework, called Institutional Risk Assessment Framework (IRAF), on which the banks/DFIs will henceforth be monitored. The new framework envisages a collaborative and seamless supervisory focus amongst the various supervisory departments within the SBP. The framework, being technology driven, would ensure swift flow of information leading to more efficient and effective banking supervision and continuous monitoring, integrating on-site inspection, off-site surveillance and current market information. The IRAF shall be based on the following four inputs based on which the banks/DFIs would be evaluated:-

(1) Compliance with Standards, Codes and Guidelines

Bank’s compliance with the standards, codes as adopted in Pakistan laws and regulations, SBP’s guidelines like regulatory and statutory requirements, code of corporate governance and risk management guidelines and instructions for sound business and financial practices. This input would be in form of a self-assessment exercise carried out by the banks duly endorsed by their Board of Directors. This self-assessment would be validated during the on-site inspections by B.I.D. This component would carry an aggregate weightage of 20%.

(2) Supervisory and Regulatory Information

Supervisory and regulatory information gathered from the findings of on-site inspection on capital adequacy, management, profitability, asset quality, liquidity etc., off-site surveillance reports as well as enforcement/compliance status from BSD and policy related issues from BPD will form the second component of this framework. This component would carry an aggregate weightage of 25%.

(3) Financial Performance and Conditions

Financial performance and condition compiled from audited annual statements, inspection reports, off-site surveillance reports/data and quarterly/annual published accounts would form the major core of this assessment. This component would carry an aggregate weightage of 40%.

(4) Market Information and Intelligence

Basic input for this component would be drawn from credit rating agencies, research reports and where applicable international supervisory reports. This component would carry an aggregate weightage of 15%.

Based on the aggregate weightage of the above-mentioned four inputs, each bank/DFI on a quarterly basis, would be assigned but not advised, a rating on a scale of 1 to 5, having similar connotations as in the case of CAMELSS approach being presently used by SBP. A schematic overview of the IRAF is attached.

Annexure