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KARACHI, Jan 9: The State Bank will introduce sometime during this quarter a new system of monitoring/surveillance and supervision of banks and development finance institutions (DFIs).
The new system called Institutional Risk Assessment Framework or IRAF is being introduced as the privatization of Habib Bank is going to place more responsibility on the SBP as the watchdog of the banking system. The system is aimed at ensuring proactive monitoring of the risks of banks and DFIs.
SBP Governor Dr Ishrat Husain on Friday issued the following statement on IRAF:
"With the privatization of HBL almost 80 per cent of banking assets will be in the hands of private sector and the SBP will have to step up its vigilance and watchdog functions in order to protect the interests of the depositors, prevent possible emergence of systemic problems in the financial sector, discourage private banks from taking excessive and unmanageable risks and take timely remedial measures."
Dr Husain said that 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 the customers require a different and new approach.
"Under the new system, the SBP will follow a cohesive supervisory approach whereby the findings from on-site inspection, periodic reports from off-site surveillance and market information will be integrated to produce a comprehensive assessment and composite internal risk rating of each banking institution," says a press release of the SBP.
"The banks which have low ratings or show high probability of deterioration in financial soundness will then be taken up for prompt corrective action." The SBP governor said: "This is a paradigm shift in the way we carry out our work but it is imperative that we adopt in response to the changing circumstances."
According to the details of IRAF available on SBP website, the IRAF shall be based on the following four inputs based on which the banks/DFIs would beevaluated:
(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 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 the on-site inspections by the 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 cent.
(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 on a quarterly basis, would be assigned but not advised, a rating on a scale of one to five.
