Circulars/Notifications - Banking Surveillance Department  
 BSD Circular No. 05 of 2010
October 05, 2010

The Presidents/Chief Executives
All Banks/DFIs

Dear Sirs/Madams

Use of Ratings – Implementation of Basel II

Please refer to section 2.3 of instructions on Minimum Capital Requirements (MCR) issued vide BSD circular 8 dated June 27, 2006.

2. In this regard it is clarified that for capital adequacy purposes the term Solicited Rating shall mean a rating initiated at the request of entity being rated under a formal agreement between the rating agency and the entity being rated. To be eligible for risk weighting purposes, the rating must meet following requirements;

i. agency is given access to all information required to rate the entity;
ii. agency is authorized to assign rating;
iii. and rating assigned is disclosed publically

3. The requirement of formal agreement between rating agency and the entity being rated, as mentioned in point (2) above, would not be applicable in case the rating is conducted by international rating agencies recognized by SBP, however rating should be publically disclosed.

4. With immediate effect, Banks/ DFIs would be allowed to use only solicited ratings assigned by recognized External Credit Assessment Institutions (ECAIs) for the purpose of capital adequacy provided the ratings fulfill following conditions;

a. All ratings used should be publically disclosed by the ECAIs along with its history.
b. The rating agency should have reviewed/ assigned the rating within previous 15 months.
c. Banks/DFIs should have mechanism to monitor changes in ratings (upgrade, downgrade and withdrawals) for accurate Capital Adequacy Ratio reporting.

All other instructions on the subject shall however, remain unchanged.

Please acknowledge receipt.

Yours faithfully,

Lubna Farooq Malik

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