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One of the principal tasks of State Bank of Pakistan is to safeguard the soundness and stability of the financial system. To achieve this objective, State Bank has instituted an effective legal and regulatory framework.
Under the legal framework, the Bank has been entrusted with necessary powers and mandate mainly under the State Bank of Pakistan Act, 1956, the Banking Companies Ordinance, 1962, Microfinance Institutions Ordinance 2001 and the Foreign Exchange Regulation Act, 1947 to regulate and supervise the activities of banks, development finance institutions, microfinance banks and foreign exchange companies. These laws are regularly reviewed and updated to address the changing environment.
The regulatory framework comprises a set of policies, guidelines, prudential standards and allied processes which cover the following key areas:
Licensing of new Commercial (Conventional & Islamic) and Microfinance banks and facilitate local and overseas Branch Expansion of Banks/DFIs/MFBs so as to attain maximum financial inclusion in sustainable manners. Further, privatization of Public Sector Banks and requests for the schemes of amalgamation/mergers of banks are processed.
The State Bank has issued different sets of Prudential Regulations which prescribe the minimum standards for risk management, operations, and fair treatment to the customers. These regulations duly cater the unique features and underlying risks of respective business sectors i.e. large Corporate financing, Small and Medium Enterprise (SME) financing, Consumer financing, Micro financing and Agriculture financing. Further, a comprehensive regulatory framework on Branchless Banking is in place which aims to promote access to finance on sustainable basis.
Policy formulation and its enforcement to ensure good Corporate Governance standards in the banking industry and application of Fit & Proper criteria for key executives and board of directors.
Effective implementation of capital adequacy regime in line with Basel Accord, and development and strengthening of related policies and instructions for the banking sector.
Develop, review and update regulatory framework on AML/CFT as per international standards and practices.
Issuance and review of guidelines on risk management, internal controls, financial disclosure and other key areas, and the panel of approved auditors (who are eligible to audit the banks and DFIs) is ensure quality of statutory audit and strengthen the market discipline.
One of the fundamental responsibilities of the State Bank is regulation and supervision of the financial system to ensure its soundness and stability as well as to protect the interests of depositors. The rapid advancement in information technology, together with growing complexities of modern banking operations, has made the supervisory role more challenging. The institutional complexity is increasing, technical sophistication is improving and technical base of banking activities is expanding. All this requires the State Bank to endeavor to keep pace with the fast-changing financial landscape of the country. As a response to these challenges and considering the international best practices, SBP has adopted a Risk Based Supervisory approach. The Banking Supervision Department-1, Banking Supervision Department-2 and Banking Supervision Department-3 conduct supervisory activities through supervisory teams, which encompass off-site supervision, on-site assessments and enforcement actions. The intensity of supervisory activities commensurate with the risk profile of supervised institutions.
On-site assessment is the most critical supervisory tool employed by SBP to have a good understanding of the institution’s business, identify potential risks that may impact institution’s reputation, safety, soundness and to assess the suitability of various supervisory actions. SBP’s On-site assessment may be a full scope inspection, limited/ focused review or thematic. Besides that SBP also periodically assesses Information Systems and Overseas Operations of the financial institutions. Apart from these regular on-site assessments, SBP is also required, under Banking Companies Ordinance, to review cases of loans written off by the financial institutions. The responsibility to carry out On-site assessment of financial institutions has been entrusted to Banking Inspection Department I & II.
SBP assesses Commercial Banks/MFB/DFIs/IBIs on the basis of CAMELS methodology. This methodology involves analysis of Capital, Asset Quality, Management, Earnings, Liquidity and System & Controls broadly on the following parameters:
It is evaluated in relation to SBP’s capital adequacy requirements and overall financial condition of the bank.
This is evaluated in relation to the level, distribution, trend, severity of adverse classifications and non-performing assets; the adequacy of provisions (general and/or specific); and management’s demonstrated ability to identity, monitor, administer, and collect problem advances and other such assets.
It is evaluated against all factors necessary to operate an institution in a safe and sound manner and thus protect depositors’ funds in accordance with acceptable practices.
This factor is examined in relation to the overall effectiveness of asset and liability management. These areas are reviewed especially with regard to compliance with cash reserve requirement and liquid asset requirement ratios as well as performance with regard to borrowings, structure and stability of deposits.
The evaluation methodology of SBP includes an assessment of the adequacy of the systems and methodologies followed, the inherent degree of an institutionalized approach and an analysis of the contribution made to the control processes at various organizational levels.
Based on the assessment of above components, an overall assessment of the financial institution is made and shared with the concerned financial institution and necessary enforcement measures are taken. Financial institutions are required to place SBP’s Onsite assessment before their Board of Directors for review and necessary actions.
State Bank’s On-site assessment of the financial institutions is an “un-published record” and thus cannot be disclosed publically according to SBP Act 1956.
Off-site supervision is another important and critical supervisory tool of the State Bank of Pakistan and is also used to reinforce the on-site assessment. It is continuous supervision process wherein regular meetings with the institutions are held, external audit reports on the institutions and regulatory returns are reviewed and key financial indicators and business developments are monitored. The off-site assessment is primarily based on the quarterly data submitted on-line by banks/DFIs through SBP’s Data Acquisition Portal under Reporting Chart of Accounts. In addition, non-financial data such as minutes of Board meetings are also analyzed. Based on available financial and non-financial data, a quarterly off-site assessment of the financial institutions is made. These assessments are made under CAELS (Capital, Asset Quality, Earnings, Liquidity, and Sensitivity to other risks) framework and takes into account financial institution’s performance in comparison with its peer groups. This assessment is used for supervisory and surveillance purposes.
SBP takes supervisory enforcement actions against those institutions that fail to comply with legal or regulatory requirements. These actions may range from imposition of penalties, administrative & financial sanctions and reference to concerned law enforcement/prosecution agencies.
The enforcement actions depend upon the nature, severity and continuity of regulatory breaches and risks posed to the institution and may range from mild to severe. The nature of intervention or corrective actions also takes into consideration behavior and ability of the institution’s management and sponsors, and the previous record of dealing with deficiencies. Supervisory enforcement actions, inter alia, include meetings with the relevant Key Executives, Chief Executive or Board of Directors of the institutions by SBP’s team.
In the mild supervisory and enforcement actions, SBP advises the institution to submit Commitment Letter, Board Resolutions /Undertaking in which management/Board of the institution resolves to correct the identified deficiencies or weaknesses within a given time. The failure to implement corrective actions by the institutions leads to initiation of severe corrective measures. Severe actions may include:
The guiding principles for resolution of problematic institutions include early identification of the problems, early intervention, cost-efficiency, objectivity and consistency of criteria, avoidance of moral hazard, and transparency. Over the years, SBP has resolved banking crisis and failures through the option which provides the greatest safeguard of depositors’ interest.
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State Bank of Pakistan (SBP) is committed to strengthening consumer protection and promoting the Fair Treatment of Consumers (FTC) within the financial sector. In line with this commitment, SBP has developed a regulatory Framework namely, "Business Conduct and Fair Treatment of Consumers Regulatory Framework (BC&FRF)". This framework sets forth principles and instructions aimed at fostering responsible business conduct, accountability, and transparency within financial sector.
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| Business Conduct and FTC Regulatory Framework (BC&FRF) | |
| Feedback Form for Public Consultation on BCFRF | |