The central bank of Pakistan has announced to
introduce a new system of monitoring, surveillance and supervision of
commercial banks and development finance institutions (DFIs). It will be
known as Institutional Risk Assessment Framework (IRAF). Dr. Ishrat
Husain, Governor, State Bank of Pakistan (SBP) has termed this 'paradigm
Under the new system, the central bank will follow a
cohesive supervisory approach whereby the finding from on-site
inspections, periodic reports from of-site surveillance and market
information will be integrated to produce a comprehensive assessment and
composite internal risk rating of commercial banks and DFIs.
According to Dr. Ishrat, "With the privatization
of Habib Bank Limited (HBL), almost 80% of banking assets will be in the
hands of private sector and thus the SBP will have to set up its
vigilance and watchdog functions in order to protect the interest of the
depositors, prevent possible emergence of systematic problems in
financial sector, discourage private banks from taking excessive and
unmanageable risks and take timely remedial measures."
According to the Governor, the previous system of
monitoring and supervision served its purpose well when the banks were
owned by the government, but market based transactions, promotion of
healthy competition and improving the efficiency and services to
customers require a different and new approach.
The banks, which have low rating or high probability
of deterioration in financial soundness will then be taken up for prompt
actions. Dr. Ishrat terms this, "A paradigm shift in the way we
carry out work, but it is imperative that we adopt in response to the
It may be right to say that the SBP initiative is
very timely. The private sector credit off-take has shot up to Rs 156.8
billion during the first half of current financial year as against the
full year target of Rs 85 billion. Therefore, the central bank should be
very vigilant of the developments and must ensure that the price
stability is not threatened.
According to banking sector experts the private
sector credit off-take has risen due to a number of factors. These
low interest rate, 2)
huge increase in lending to agriculture, small and medium enterprises, 3)
enhanced consumer loans, 4)
higher cotton price, 5)
enhanced credit requirement of large scale manufacturing sector, 6)
boon in equities market and 7)
fewer issues of term finance certificates (TFCs) by the corporates.
According to the details available at the SBP website
the IRAF shall be based on the four inputs for the evaluation of banks
and DFIs. These are:-
1) COMPLIANCE WITH STANDARDS, CODES AND GUIDELINES:
Banks' 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 the 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 on-site inspections by Banking
Inspection Department of the SBP. This component would carry an
aggregate weightage of 20 per cent.
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 the Banking Supervision Department
and policy related issues from the Banking Policy Department will form
the second component of this framework. This component would carry an
aggregate weightage of 25 per cent.
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 per
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 per cent.
Based on the aggregate weightage of the four inputs,
each bank/DFI would be assigned but not advised, a rating on a scale of
one to five.