KARACHI, Jan 14: The State Bank will hold regular meetings with the board of directors, senior management and external auditors of banks and DFIs to know in advance if there is a crisis in the making.

The central bank will hold such meetings at least once a year with banks, DFIs having satisfactory rating "but more frequently with banks, DFIs having unsatisfactory ratings", according to a circular issued here on Wednesday.

The circular issued by the SBP's Banking Supervision Department says that the decision is part of a policy to strengthen the interaction between the State Bank and banks and DFIs.

Such meetings will help banks and DFIs share with the SBP the different challenges facing them and discuss matters like group structure, strategy, market positioning, corporate governance, risk management, performance, capital adequacy, liquidity and asset quality, etc. The schedule, agenda and level of participation of such meetings will be communicated in advance to each bank and DFI. The meetings would be held in a structured manner focusing on the agenda items.

It is also mandatory now for banks and DFIs to inform the SBP's Banking Supervision Department "promptly about any substantive changes in their activities or any material adverse development, including breach of legal and prudential requirements. Such information should be submitted to the department in a concise manner, as and when any such developments take place. During the course of regular inspections, the SBP's Banking Inspection Department "shall check, on test basis, that the banks/DFIs have followed these instructions."

The banking sector is witnessing a change from a fully- controlled and compliance-based supervisory regime to a market- based one. As a result, the concept of risk-based banking supervision is gaining importance and needs to be strengthened.

The State Bank has already issued guidelines on the Risk Management and Corporate Governance and has taken steps to strengthen risk-based supervision.

"The main objective of all these efforts is to avoid any sudden crisis situation, which may cause a systemic risk to the whole banking sector," says the circular. In order to achieve this objective, combined efforts of the supervisor, regulator and the institutions that are regulatedare required.