Transcript lecture 19 ver2.pptx

Session: NINETEEN
MBF-705
LEGAL AND REGULATORY ASPECTS
OF BANKING SUPERVISION
OSMAN BIN SAIF
Summary of last session
• Examples of Bank Supervision Approaches
– Bank Supervision in Britain
– Bank Supervision in Continental Europe
– Bank Supervision in United States
– Bank Supervision in Pakistan
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Agenda of this session
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Banking sector Supervision in Pakistan
Financial sector of Pakistan
Banking Companies Ordinance
Powers of State Bank of Pakistan
Prudential Regulation for Banks
Off site --- On site Monitoring at SBP
Monitoring policy of SBP
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Banking Sector Supervision in
Pakistan
• State Bank of Pakistan (SBP) which is the
Central Bank of the country has been inter-alia
entrusted with the responsibility for an
ongoing effective supervision of the banking
sector.
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Banking Sector Supervision in Pakistan
(Contd.)
• The relevant provisions of law which vest
powers in State Bank of Pakistan (SBP) to carry
out inspection of banks are contained in the
Banking Companies Ordinance, 1962.
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Banking Sector Supervision in Pakistan
(Contd.)
• Besides, State Bank of Pakistan Act, 1956 and
the Bank’s Nationalization Act, 1974, The
Financial Institutions (Recovery of finances)
Ordinance, 2001, Companies Ordinance, 1984
and Statutory Regulatory Orders (SROs) are
the relevant legislations, which cover the
activities concerning the banking sector.
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Financial Sector of Pakistan
• The financial sector in Pakistan comprises of:
– Commercial Banks,
– Development Finance Institutions (DFIs),
– Microfinance Banks (MFBs),
– Non-banking Finance Companies (NBFCs)
– Modarabas,
– Stock Exchange and
– Insurance Companies
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Financial Sector of Pakistan (Contd.)
• Non-banking Finance Companies (NBFCs)
include;
• leasing companies,
• Investment Banks,
• Discount Houses,
• Housing Finance Companies,
• Venture Capital Companies,
• Mutual Funds
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Financial Sector of Pakistan (Contd.)
• Under the prevalent legislative structure the
supervisory responsibilities in case of Banks,
Development Finance Institutions (DFIs), and
Microfinance Banks (MFBs) falls within legal ambit of
State Bank of Pakistan
• While the rest of the financial institutions are
monitored by other authorities such as Securities
and Exchange Commission and Controller of
Insurance.
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Financial Sector of Pakistan (Contd.)
• Under the WTO commitments the operational
status of branch network of foreign banks
operating in Pakistan as on 31-12-1997 has
been protected and frozen.
• However, existing foreign banks having less
than 3 branches can have branches to the
extent of maximum number of 3 only.
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Financial Sector of Pakistan (Contd.)
• New foreign banks desirous of entering
banking business in Pakistan will now be
required to incorporate as domestic bank
under the local laws.
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Financial Sector of Pakistan (Contd.)
• The branches of foreign banks operating in
Pakistan can also be converted into a local
commercial bank by incorporating under the
local laws and subject to a minimum paid up
capital of Rs.1 billion provided foreign share
holding is restricted to a maximum of 49%.
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Financial Sector of Pakistan (Contd.)
• At present there are;
– 41 scheduled banks,
– 6 DFIs, and
– 2 MFBs operating in Pakistan.
• Whose activities are regulated and supervised
by State Bank of Pakistan.
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Financial Sector of Pakistan (Contd.)
• The commercial banks comprise of;
– 3 nationalized banks,
– 3 privatized banks,
– 15 private sector banks,
– 14 foreign banks,
– 2 provincial scheduled banks, and
– 4 specialized banks.
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Banking Companies Ordinance
• Under the Banking Companies Ordinance,
1962 the State Bank of Pakistan is fully
authorized to regulate and supervise banks
and development finance institutions.
• During the year 1997 some major
amendments were made in the banking laws,
which gave autonomy to the State Bank in the
area of banking supervision.
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Banking Companies Ordinance(Contd.)
• Under Section 40(A) of the said Ordinance it is
the responsibility of State Bank to
systematically monitor the performance of
every banking company to ensure its
compliance with the statutory criteria, and
banking rules & regulations.
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Banking Companies Ordinance(Contd.)
• In every case in which the management of a
bank is failing to discharge its responsibility in
accordance with the applicable statutory
criteria or banking rules & regulations or is
failing to protect the interests of the
depositors or for advancing loans and finance
without due regard for the best interests of
the bank or for reasons other than merit, the
State Bank is empowered to take necessary
remedial steps.
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Powers of State Bank of Pakistan
• The State Bank of Pakistan can, inter-alia,
exercise the following powers vested upon it
under the Banking Companies Ordinance:– Prohibiting the bank from giving loans, advances
& credits.
– Prohibiting the bank from accepting deposits.
– Cancel license of a bank.
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Powers of State Bank of Pakistan
(Contd.)
– Give directions to the bank as it deem fit.
– Remove chairman, directors, chief executive or
other managerial persons from the office and
– appoint a person as chairman, director or chief
executive.
– Supersede the Board of Directors.
– Direct prosecution of directors, chief executive or
other officer.
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Powers of State Bank of Pakistan
(Contd.)
– Caution or prohibit bank against entering into any
particular transaction(s).
– Require bank to make changes in management.
– Appoint its officers to observe the manner in
which affairs of bank/its branches/office are
conducted.
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Powers of State Bank of Pakistan
(Contd.)
– Winding up the bank through high court.
– Impose penalties including civil money penalties.
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Prudential Regulations for Banks
• The State Bank has framed Prudential
Regulations for banks and Rules of Business
for DFIs that present a prudent operating
framework within which banks and DFIs are
expected to conduct their business in a safe
and sound manner taking into account the
risks associated with their activities.
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Prudential Regulations for Banks
(Contd.)
• These regulations incorporate the spirit and
essence of BIS regulations and are constantly
watched for possible improvement so that
their enforcement yields the best results to
promote the objectives of supervision.
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Prudential Regulations for Banks
(Contd.)
• The State Bank is empowered to determine
Statutory Liquidity and Cash Reserve
Requirements for banks/DFIs.
• Presently the Cash Reserve Requirement is 5%
on weekly average basis subject to daily
minimum of 4% of Time & Demand Liabilities.
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Prudential Regulations for Banks
(Contd.)
• In addition to that banks are required to
maintain Statutory Liquidity Requirement
(SLR) @ 15% of their Time & Demand
Liabilities.
• Similarly, DFIs are required to maintain SLR of
14% and Cash Reserve of 1% of their specified
liabilities.
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Prudential Regulations for Banks
(Contd.)
• The Banking Companies Ordinance had been
amended in 1997 which empowers the State
Bank to prescribe capital requirements for
banks.
• In exercise of these powers the State Bank has
laid down Minimum Capital Requirements for
banks based on Basle capital structure.
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Prudential Regulations for Banks
(Contd.)
• The banks have to maintain a Capital
Adequacy Ratio in a way that their capital and
unencumbered general reserves are, at the
minimum, 8% of their risk weighted assets,
and effective from 1st January, 2003 banks are
required to maintain a minimum paid up
capital level of Rs.1 Billion.
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Off-site and On-site Monitoring
• While the off-site monitoring aspect is looked
after by the State Bank of Pakistan’s Banking
Supervision Department the responsibility for
the on-site examination of the banking system
in Pakistan lies on the shoulders of the
Banking Inspection Department.
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Off-site and On-site Monitoring
(Contd.)
• This has been designed to ensure that
institutions operate in a safe and sound
manner.
• The focus of the supervisory efforts by the
State Bank of Pakistan is on the health and
stability of the banking system in Pakistan.
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Off-Site Monitoring at BSD
• The objectives of off-site surveillance over the
banking system are:– to monitor the condition of individual banks,
– as well as condition within the banking system;
– to provide early identification of problems so that
corrective action can be effected; and
– to target scarce on-site supervisory resources to
areas or activities of greater risk.
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Off-Site Monitoring at BSD (Contd.)
• Off-site surveillance system revolves around;
– receipt, review and analysis of periodic financial
statements and returns submitted to the State
Bank.
• The off-site analysis facilitate monitoring of
each bank’s performance and its observance
of supervisory requirements over time, so that
problems may be identified as soon as these
emerge.
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Off-Site Monitoring at BSD (Contd.)
• The process thus assists in making the most
effective use of scarce on-site inspection
resources.
• The system also works as an early warning to
identify those areas which reflect high
probability of financial difficulties so that
policies and corrective actions can be
designed and implemented accordingly.
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On-site Monitoring at BID
• In consonance with the responsibilities
envisaged under the Core Principles
recommended by the Basle Committee, the
On-Site examination capabilities at the State
Bank of Pakistan have been substantially
augmented to bring them at par with the
expected international standards.
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On-site Monitoring at BID (Contd.)
• While regulations have existed for some time
aimed at convergence of the essential industry
indicators to the globally accepted criteria, a
risk-based approach to evaluations has been
adopted by the bank in all its assessments.
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On-site Monitoring at BID (Contd.)
• Periodic On-Site examinations of the financial
condition of institutions, falling within SBP’s
jurisdictions, remains the most effective
supervisory tool, which support Banking
Supervision Departments in maintaining a
proactive approach in discharge of the
statutory responsibilities.
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Monitoring Policy of SBP
• The State Bank of Pakistan’s policy for
frequency of inspection of banks and DFIs is
designed to provide flexibility in scheduling
inspections consistent with the need to
maintain safety and soundness.
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Monitoring Policy of SBP (Contd.)
• The policy provides a framework within which
supervisory ratings, surveillance and financial
monitoring results, and other appropriate
indicators of banks soundness, are to be
considered in carrying out the State Bank of
Pakistan’s fundamental policy of subjecting
each bank and non-bank financial institution
under its supervision to a periodic on-site
inspection.
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Monitoring Policy of SBP (Contd.)
• With a view to streamline the approach and
the underlying procedures for effective and
efficient banking supervision State Bank of
Pakistan has embarked upon a major
overhauling of its own capabilities so as to
bring them at par with international practices.
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Monitoring Policy of SBP (Contd.)
• This entailed hiring of services of consultants
of world repute (M/s. Arthur Andersen) under
the FSID Project of the World Bank.
• These Consultants have compiled extensive
on-site and off-site manuals. Besides qualified
and professional trained human resource have
been recruited and rigorous theoretical and
hands-on training has been provided to them.
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Monitoring Policy of SBP (Contd.)
• With the shift in supervisory focus from
‘compliance oriented’ to ‘Risk Assessment
Approach’ State Bank of Pakistan has
developed a uniform bank rating system in
conformity with international
standards/benchmarks.
• Now each bank is appraised under the
CAMELS Rating System.
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Monitoring Policy of SBP (Contd.)
• In order to portray a legitimate and true
financial condition of a bank the off-site
surveillance system and the on-site inspection
functions of banking supervision work
extremely close together.
• As a result of these close coordination bank
ratings reflects as accurately as possible, the
true financial condition of a bank and the
banking system as a whole.
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Summary of this session
•
•
•
•
•
•
•
Banking sector Supervision in Pakistan
Financial sector of Pakistan
Banking Companies Ordinance
Powers of State Bank of Pakistan
Prudential Regulation for Banks
Off site --- On site Monitoring at SBP
Monitoring policy of SBP
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THANK YOU
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