Bank of Papua New Guinea (BPNG) Non-bank Supervision Practices and Regulation

presented by

Boas Irima, Unit Manager, Banks & Finance Companies Unit

Banking Supervision Department, BPNG for

Pacific Financial Inclusion Working Group Meeting

26 January 2012

Presentation Outline

   

Overview of PNG Financial System BPNG Organisation Structure Supervisory Approach The Way Ahead

Overview of PNG Financial System

 Central Banking Act 1973, as amended in 2000, gives BPNG power to formulate and implement monetary policy,

regulate and supervise the financial system

and ensure an efficient national and international payments system.

 BPNG supervises all depository corporations; commercial banks, financial companies, microfinance institutions, savings and loans societies, and financial corporations (i.e. superannuation funds and life insurance companies and brokers).

Overview of PNG Financial System (cont…)

 Acts relating to the regulation and supervision of the financial system administered by BPNG:

ACT

Banks and Financial Institution Act 2000 Superannuation (General Provision) (Amendment) Act 2007 Life Insurance (Amendment) Act 2004 Savings and Loans Societies Act 1995

APPLICATION

Banks, Finance Companies, Microfinance Superannuation Funds, Investment Managers, Fund Administrators Life Insurance Companies and Brokers Savings and Loans Societies (Credit Unions)

Industry Type (PGK = USD0.47)

Size of PNG Financial System

Number of Institutions Commercial Banks Finance Companies Microfinance Institutions (MFI) Savings and Loan Societies Authorized Super Funds Life Insurance Companies Investment Managers Fund Administrators Life Insurance Brokers Money Changers Total 4 7 3 22 6 4 2 4 4 5 61

Source: Quarterly Call Returns, 30 September 2011.

Total Assets (K’Million) 20,798.2

917.7

140.0

801.9

6,036.0

364.0

29,057.8

Asset Composition (%) 71.6

3.1

0.5

2.8

20.8 1.3

100.0

Microfinance Institutions KPIs (%)

Microfinance Institutions 31/12/10 31/03/11 30/06/11 30/09/10 30/09/11 Capital Ratios

Total Capital to Risk Weighted Assets Tier 1 to Risk Weighted Assets Tier 1 to Total Assets (Leverage)

Asset Quality Ratios

NPL’s to Total Assets NPL’s to Total Loans Over due Loans to Total Loans Provisions to Total Loans Provisions to NPL’s

Earnings Ratios

Return on Assets Return on Equity

Liquidity Ratios

Liquid Assets to Deposit + STL Total Deposit to Total Assets Total Loans to Total Deposits Source: Quarterly Call Returns.

25.0

29.6

12.0

3.4

15.4

19.6

4.4

28.8

-2.8

78.9

87.3

25.2

17.4

26.5

11.1

2.7

11.4

15.1

6.3

55.8

-4.0

72.9

89.4

26.6

15.9

15.3

6.7

3.0

11.9

18.8

4.6

38.9

-0.4

71.0

89.9

27.9

9.2

9.2

3.6

2.9

10.9

14.6

4.8

43.8

-5.5

71.7

92.2

28.9

9.4

8.8

3.3

2.5

8.9

12.1

4.7

53.0

0.1

3.1

69.9

93.4

29.4

System Aggregate (30/09/11) 29.7

20.2

9.8

1.0

2.3

3.8

2.9

96.3

2.5

28.3

70.4

77.2

49.2

BPNG Organizational Structure

BOARD & COMMITTEES Internal Audit GOVERNOR DEPUTY GOVERNOR Assistant Gov.

Corporate Affairs Human Resource Information Technology Corporate Services Assistant Gov. Financial System Supervision Banking Supervision Super & Life Insurance Assistant Gov. Financial Operations Financial Markets Finance & Accounting Assistant Gov. Monetary & Economic Policy Economics Research Banking Currency

Financial System Supervision Structure

GOVERNOR DEPUTY GOVERNOR Assistant Gov. Corporate Affairs Assistant Gov. Financial System Supervision Assistant Gov. Financial Operations Assistant Gov. Monetary & Economic Policy Manager Banking Supervision Department Banks & Finance Companies Unit Savings & Loans Society Unit Microfinance Unit Policy Unit Manager Super & Life Insurance Supervision Life Insurance Unit Superannuation Unit Policy Unit

Supervisory Approach

Following financial sector reform in 2000, BPNG introduced:    Stringent supervision of financial institutions by enforcing the Acts Issuance of a number of prudential standards, directives and regulations under the Acts Enhance supervisory techniques of supervised institutions

Supervisory Approach (cont…)

Two Supervisory Methods:



On-site Inspections

i. Assessment of risk during visits to supervised institutions, covering liquidity, operational, credit and market risks. Include review of risk governance, board, management, strategy/planning and capital ii. Determination of appropriate supervisory response iii. Issue Report of Examination (ROE)

Supervisory Approach (cont…)



Off-site Monitoring

i. Assessment of risk through information received from supervised institutions such as financial returns, correspondences and discussions at prudential meetings. Include review of supervised institutions responses to matters requiring attention from on-site inspections ii. Determination of appropriate supervisory response iii. Follow through on matters requiring attention until these are closed off In addition BPNG also does:   Licensing and Policy Work Enforcement and Compliance

Supervisory Approach (cont…)

Risk Based Supervisory Cycle

Supervisory Approach (cont…)

CAMELS rating system used to rate financial institutions, an acronym for:  C – Capital Adequacy  A – Asset Quality  M – Management  E – Earnings  L – Liquidity  S – Sensitivity to Market Risk A rating between 1-5 is used on each acronym as well as overall with number 1=Very Good to 5 = Poor.

Supervisory Approach (cont…)

Ratings assigned, used for:    Off-site monitoring of trends and severity of problems Prioritising on-site inspections Eg. On-site reviews are done every two years for well managed institutions (CAMELS 1-2 rated institutions). For institutions rated 3-5, reviews are done more frequently Determining the appropriate supervisory responses and enforcement actions

The Way Ahead

   Explore separate regulatory framework for MFIs Microfinance unit to eventually take on MFI supervision Review of the Savings and Loans Societies Act

Questions???