The Presidents/Chief Executives
All Banks/DFIs

Dear Sirs/Madam,

Policy Framework in Banks / DFIs

Good governance is essential for the long-term survival and success of any financial institution. One of the basic areas of good governance is that the Board of Directors formulates polices in various areas and ensures their implementation. The Board of Directors is also responsible for setting the strategic direction and standards of management’s performance through effective and socially responsible policy framework.

2) Keeping in view the importance of policy framework, the State Bank, from time to time, has issued instructions in the form of various Circulars and Guidelines. In order to facilitate banks / DFIs and to ensure compliance of regulatory requirements, it has been decided to issue consolidated instructions on policy framework. The objective of this exercise is to ensure that banks/DFIs have policies in various areas that are synchronized and have uniformity according to varied nature of their respective operations. Accordingly, the banks / DFIs are advised to formulate policies in the following areas, as a minimum, and ensure their regular updation: -

1. Risk Management Policy
2. Credit Policy
3. Treasury & Investment Policy
4. Internal Control System and Audit Policy
5. I.T. Security Policy
6. Human Resource Policy
7. Expenditure Policy
8. Accounting & Disclosure Policy

3) The above policies to be formulated by each bank / DFI with the approval of their Board of Directors shall be in line with complexity of their operations and cover, as a minimum, the requirements set out at Annexure-A. The Board should also clearly define the periodicity for review / updation of the policies. Banks/DFIs would be free to formulate policies in any other areas in addition to those listed above. Islamic banks / Islamic banking branches shall ensure that their policies in the above areas are in line with the Shariah Principles.

4) Policies in the areas like Internal Controls, Risk Management, IT Security on which there are detailed guidelines/instructions provided by SBP must be prepared / updated in light of those guidelines. Further a Business Continuity Plan as required under the SBP guidelines issued vide BSD Circular 13 of 2004, must contain, at the minimum, the points listed at Annexure –B.

5) While preparing/reviewing the policy document, banks/DFIs must distinguish between Policy Documents and Procedural Manuals, as both are distinct from each other. Policy document should delineate guiding principles and the procedural manuals should describe what step by step operational activities are to be performed to accomplish those principles. It should be clearly noted that existence of a Procedural Manual in any area can in no way be deemed a substitute for the Policy Document.

6) Banks/DFIs shall review their existing policies in the light of minimum requirements to ensure that their existing policies are consistent with them. In case any of the bank/DFI has not yet formulated any of the policies listed at Para 2 above, it should immediately start work on formulation of such policies. All Banks/DFIs are required to complete the process of reviewing existing policies and/or formulating new policies by September 30, 2007 and submit a confirmation to the same, with references to the Board approvals, latest by 15th October 2007.

7) All banks/DFIs are advised to ensure meticulous compliance of such developed policies and submit a report on compliance with the developed polices to the Banking Surveillance Department within one month from the end of each calendar half year i.e. 30th June and 31st December of each year. The first such report shall be submitted for the year ending 31st December 2007 by 31st January 2008.

8) The State Bank’s Banking Inspection (On-site) Department, during the course of inspection of banks/DFIs, will check compliance with these instructions.

9) The instructions issued vide this circular would withdraw the earlier instructions on the subject. A reference index to the earlier instructions, which have been consolidated /withdrawn by this circular, is given at Annexure-C.