on Internal Credit Risk Rating Systems in Banks/DFIs
identification and measurement of risk are prerequisites
for an effective risk management. As the credit risk is
the primary financial risk in the banking system, it should
be efficiently and properly identified and measured, at
all individual exposure levels. The assessment of the ability
of each counterparty to fulfill its credit obligations is
pre-requisite for building a robust credit risk management
mechanism in every financial institution. This evaluation
process is generally carried out through a credit risk rating/scoring
mechanism. The importance of such mechanism necessitates
that all financial institutions should have carefully designed
risk rating systems to strengthen their overall risk management
2. Keeping in view the importance of internal risk rating
systems in the credit risk management and to further strengthen
the risk management functions in banks/DFIs, State Bank
has prepared guidelines on Internal Risk Rating Systems
which are attached.
These guidelines will supplement the Guidelines on Risk
Management already issued vide BSD Circular No. 07 dated
August 15, 2003.
3. Banks/DFIs are free to adopt any of the rating systems/methodologies/techniques
keeping in view their size, complexity of operations and
clientele base and may have as many credit grades as they
wish. However, for reporting purpose to the State Bank,
banks are required to map their ratings to the SBP grades
defined in the Annexure A of the guidelines. The mapping
should be based on the given definitions and the bank’s
internal definitions of the credit ratings.
4. All banks and DFIs are required to develop their internal
credit risk rating policy duly approved by their Board of
Directors and formulate a robust risk rating framework.
Such developed policy may be made part of their credit risk
or risk management policy. The policy covering Obligor Ratings,
as mentioned in Section 3.2(2) of the attached guidelines,
must be developed and all exposures must be rated in the
light of such developed policy latest by June 30, 2008.
A copy of the policy should be sent to Banking Surveillance
Department, State Bank of Pakistan latest by 30th June 2008.
Banks/DFIs are further advised to map their internal risk
ratings grades to the grades provided by the State Bank
and report these mapped ratings in their regular eCIB reporting
in the field IBRATING from the month of July 2008.
6. All Banks/DFIs are encouraged to establish their systems
for carrying out Facility Ratings as mentioned in Section
3.2 (2) as soon as possible. They are further advised to
submit a plan, latest by 31st March 2008, mentioning therein
the detail of the identified activities with timelines for
establishing the system for Facility Ratings.
7. Eventually all the banks will be required to further
strengthen their internal risk rating systems as per the
detailed requirements issued for the Internal Rating Based
(IRB) approaches of Basel II.