KARACHI, Oct 14: Banks are getting prepared to implement risk management guidelines issued by the State Bank in the middle of August aimed at making banks more prudent in conducting banking business.

Inquiries made at a number of banks reveal that they are at advanced stage of implementing these guidelines, particularly those relating to credit risk management.

A senior official at the state-run National Bank said that NBP had developed a new internal risk management manual, which the bank would implement after its approval from the board of directors.

The manual will be presented before the board on Friday. The NBP official said that the bank started internal risk rating of its borrowers in January this year, adding that the rating is awarded on scoring basis that the bank arrives at by answering several questions relating to the borrowers capacity to use NBP financing profitably — and repay the same on time.

A senior executive at Habib Bank said that the bank had already been conducting internal credit ratings of all corporate customers and up to 50 per cent of commercial borrowers. He said this credit rating initiated about two years ago is often fine-tuned on the basis of the feedback received from customers and the bank employees handling them. The official said since his bank was currently preparing for privatization and part of its problem loans were being transferred to the CIRC focussing exclusively on internal risk management is not an urgent preference. The Corporate and Industrial Restructuring Corporation is taking up those HBL problem loans that fall under its jurisdiction i.e. the loans have remained unpaid for more than a year and that they are worth Rs30 million or more.

In mid-August the SBP issued risk management guidelines that required banks and development finance institutions to devise action plans for dealing with problem loans and start assigning internal credit ratings to individual credit exposures. These guidelines will eventually form part of the New Basle Capital Accord once the accord is introduced in Pakistan and will become an enforceable regulation.

The SBP also asked the banks and DFIs to start submitting half- yearly reports the measures taken by them for the implementation of these guidelines. They are supposed to submit the first-ever report relating to the half-year ending on December 31, 2003 by January 31, 2004.

The guidelines require the banks and DFIs to introduce measures to manage (i) credit risk (ii) market risk (iii) liquidity risk and (iv) operational risk.

It is under credit risk management that the banks and DFIs are supposed to start assigning internal credit ratings to borrowers.

Senior bankers say whereas the banks and DFIs would preferably have to set up separate departments for risk management under one roof, most of them are initially focussing on beefing up internal credit risk rating system or laying down a procedure for the same — where it does not exist.

A senior executive at the privatized United Bank said the bank had already introduced an elaborated internal credit risk rating mechanism known as ORR or obliger risk rating system. He said the bank was updating this system to make it fully compatible with the SBP guidelines. The official explains that under the ORR system the bank assigns 1-10 internal credit ratings, adding that the credit exposures with 1-4 ratings are considered good but the one that gets rating 5 is put on watch list. He said the credit exposures rated 6-7 were treated falling under non-performing loans. Below 7 ratings indicate the exposures may turn out to be loss-making for the bank. He explains that different criteria are applied on gauging credit risk exposures of short-term and medium to long- term loans. Similarly, credit risks associated with import/export letters of credit are assigned internal risk ratings separately because non-payment for up to six months under import/export LCs are treated as sure loss.

Inquiries made at some other local banks show that they too are either in the process of developing internal credit risk ratings system or have already ones and making them compatible with the SBP guidelines. Executives of foreign banks say they already have in place elaborated systems for evaluating credit risks — and often assign internal credit ratings to individual credit exposures. But they say they are also working exclusively for implementing the State Bank guidelines on risk management.

At the end of June this year non-performing loans or problem loans of all commercial banks combined stood at Rs162.4 billion. NPLs of specialized banks and DFIs totalled Rs86.5 billion. Bankers say since the banking system has been awash with excess money — and banks are venturing into newer areas of lending to employ it gainfully the need to manage credit and other risks has become all the more pronounced.