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- Banking Policy & Regulation Department
- State Bank of Pakistan
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- The financial system is pre-dominantly bank-based as banking sector
assets constitute around 73% of the total financial sector assets.
- Banks have improved their risk management practice over the year which
has resulted in improved their performance
- Net NPLs to net advances have reduced to 3.1% as on December 31, 2013.
- Banking sector is well capitalized with overall Capital Adequacy Ratio
at 16% as on December 31, 2013
- Efforts are under way to improve the excess of banking services to the
un-served population of the country.
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- Autonomy and capacity enhancement of
SBP
- Transformation of ownership structure with dominance of private sector
and significant foreign ownership.
- Asset share of public sector banks decreased from 92 % in 1990 to 20 %
- Assets quality of the banks has improved and net NPL to net loans ratio
reduced over the years and stands at 3.1 %(31-12-13)
- High growth of the balance sheet size of the banking system and
enhancement in the range and quality of services
- Contribution to Government revenue enhanced owing to improved
profitability.
- Access of finance and financial services to the under served segments
like consumer finance, SME Finance, Housing Finance, Agriculture and
Microfinance has increased.
- Growth of Islamic Banking, Micro finance, on-line/ internet banking and
branchless banking in the country.
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- SBP risk-based supervision framework comprises:
- Effective on-site inspection and off-site surveillance mechanism which
duly takes into underlying risks of the banks,
- Keeping in view the importance of risk management in bank, SBP has
issued instructions and minimum standards to be followed in the following areas:
- Capital Policy & Basel Capital Accord
- Risk Management & Internal Controls
- Stress Testing
- Financial Disclosure
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- SBP has set the following two (2) capital standards for the banks to
comply with:
- Minimum Capital Requirement (MCR) in nominal terms i.e., Paid up
capital net of losses – PKR 10 billion
- Risk-based Capital adequacy Ratio – Currently 10% which will be raised
to 12.5% under the Basel III.
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- SBP aimed to achieve the following broader objectives through the MCR standard:
- To ensure banks have sufficient core capital base to bear shocks on
account of unexpected losses so as to counter any fragilities in the
financial system;
- Ensures that the bank operates at a size which is more conducive to
economies of scale;
- Increase the financial stake of sponsors/owners in order to encourage
prudent behavior.
- The GFC revealed that dozens of the largest US & European banks had
enough regulatory capital to satisfy Basel capital standards but were
having insufficient good quality (i.e. loss absorbing) capital.
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- SBP implementation Basel I from December 31, 1997.
- CAR requirement increased to 9% from 2008 and to 10% from 2009.
- Under Basel III the CAR will be gradually raised to 12.5%.
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- All banks/ DFIs are on Standardized Approach of Credit Risk with ten
(10) banks on comprehensive approach while the rest on simple approach of
CRM.
- For Market Risk Banks are using the Standardized approach
- In case of Operational Risk capital charge, most of the banks are on Basic
Indicator approach. Two banks are on The Standardized Approach and two
banks are on Alternate Standardized Approach (ASA) while one banks are
reporting under ASA on parallel run basis.
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- Basel III provides both micro and macro-prudential tools to safeguard
financial stability:
- As a micro-prudential (bank-level) tool, Basel-III would help raise the
resilience of individual banking institutions during periods of stress;
- As macro-prudential (system-wide) tool it addresses the risks that can
build up across the banking sector or broader economies because of the
cyclical nature, concentrations, and interconnectedness of the global
financial industry.
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- Basel III refers to a set of documents each addressing a particular key
measure proposed by BCBS which includes the following worth mentioning
documents;
- Basel III: A global regulatory framework for more resilient banks and
banking system – December 2010 (revised June 2011) – Implemented
- Guidance for national authorities operating the countercyclical capital
buffer – December 2010. Almost implemented
- Global systemically important banks (GSIFIs) – Assessment methodology
and the additional loss absorbency requirements – November 2011.
- Domestic SIFIs (DSIFIs) – In Process
- Requirements related to loss
absorbency at point of non-viability – Press Release January 13, 2011. Implemented
- International framework for liquidity risk measurement, standards and
monitoring – December 2010. To be implemented
- Revisions to the Basel II market risk framework – July 13, 2009.
- Guidelines for computing capital for incremental risk in the trading
book – July 2009. Waiting for final outcome of the trading book review
by the BCBS
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- Guidelines on Risk Management - 2003
- Guidelines on Internal Controls - 2004
- Guidelines on IT Security (2004) & Information Systems - 2005
- Financial Derivatives Regulations - 2004
- Policy Framework in Bank - 2007
- Fraud risk Management & Reporting - 2014
- Prudential Regulations - updated
on an on-going basis
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- SBP has issued separate set of PRs for the following portfolios:
- PRs for Corporate / Commercial Banking
- PRs for Agriculture Financing
- PRs for SMEs Financing
- PRs for Consumer Financing
- PRs for Micro Finance Banks
- Instructions on Shariah Compliance in Islamic Banks.
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- The PRs for Corporate/Commercial Banking cover the following four areas:
- Risk Management – Limit on exposure to single borrower, against shares,
against unsecured financing, provisioning against NPLs, etc
- Corporate Governance - FPT for board members & key executives, etc.
- Customer Due Diligence & AML – To prevent the use of banking
channels for ML & TF, etc.
- Operations – refrain banks from window dressing, timely settlement of
suspense account entries, etc.
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- SBP issued “Stress Testing Guidelines” in 2005 which were subsequently
revised in 2012
- Cognizant of the critical role that stress tests can play in identifying
the vulnerabilities of banks/
DFIs at the early stage SBP has adopted two-pronged Strategy.
- SBP carries out in-house stress testing of all banks on quarterly basis
using sensitivity analysis & ii) Scenario analysis
- Institutionalizing Stress Testing Framework at Banks. Banks are
required to carry out a set of 18 mandatory sensitivity tests on
quarterly basis. Moreover, big banks, having share of more than 4% of
the assets of the banking system are also required to design advanced
stress tests which include Scenario analysis, stress tests for
operational risk and Liquidity risk and Islamic banking operations.
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- IFRS as issued by IASB are implemented in Pakistan
- IAS-39 has been suspended, however, SBP’s specific regulations on the topic are largely
in line with the spirit of the IAS.
- SBP has prescribed comprehensive disclosure formats and requirements
which embody internationally accepted best practices.
- There is effective mechanism for statutory audit and quality assurance
thereof.
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- BCPs are minimum universal benchmarks for sound supervisory practices
- BCPs assessment judge adequacy both of rules and the supervisors'
ability to monitor and limit major risks confronted by banks
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- SBP is working on developing and enhancement of framework for
consolidated supervision.
- Deposit Protection Scheme.
- Development of structured framework of
Macro-prudential supervision.
- Instruction on Loss Data Collection & Data pooling for Advanced
Operational Risk approaches
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- SBP has been monitoring banking groups on consolidated basis.
- A joint task force (JTF) with SECP has also been set up for coordination
and cooperation on supervision of financial conglomerates.
- Some of the main achievements are as follows:
- Identification of group structures of all banks and major
conglomerates,
- Mapping of ownership and shareholding structures of banking groups,
including parent, subsidiaries, associations and sibling entities under
common control of banks’ sponsors,
- Ongoing assessment of banking groups,
- Regular sharing and discussion of information and regulatory
assessments & concerns with SECP
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- The SBP-SECP JTF is presently working on the development of specific
trigger points for financial conglomerates which will be used as early
warning system to initiate more frequent and focused discussions between
JTF members in respect of distressed conglomerates.
- SBP is also in consultation process for making certain amendments in the
banking law to secure necessary regulatory powers in respect of banking
groups, formalize the roles of lead and functional supervisors, and
introduce the concept of non-operating holding company structure.
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- Consequent upon privatization of banks, safety of deposits is no more
guaranteed by the Government except for the banks owned by it.
- Proposed Deposit Protection Law would help to protect small depositors
and ensure financial stability.
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- In the backdrop of GFC, Pakistan is planning to design and implement
macro prudential policy framework in order to have a system wide view
and to define optimal and timely policy responses to control and make
financial system more resilient against system risk.
- A cross cluster Task Force along with its TOR has been developed.
- A cross-cluster Joint Task Force (JTF) along with their detailed Terms
of Reference (TORs) has been developed.
- JTF would work out the conceptual, analytical and institutional details
in order to develop a macro prudential policy framework for Pakistan.
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Notes
