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MGT604 - Management of Financial Institutions - Lecture Handout 09

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Banking Surveillance Department

Health of an economy depends on the degree of safety and stability of its banking and financial system. A sound, stable, and robust banking and financial system is a pre-requisite for economic well being of a country and its populace. In Pakistan, ensuring the stability and soundness of the banking system is a statutory responsibility of State Bank of Pakistan. The banking supervision departments viz. Banking Policy and Regulations Department (BP&RD), Banking Surveillance Department (BSD), Off-Site Supervision and Enforcement Department (OSSED) and Banking Inspection Department have been assigned this important function to work jointly and severally to ensure the soundness of individual banks and of overall banking industry. The Department is responsible to supervise financial institutions in the country. The department ensures effective adherence to regulatory & supervisory policies, monitors risk profiles, evaluate operating performance of individual banks/DFIs & the industry as a whole while issuing guidelines for managing various types of risks. It also ensures that banks are adequately capitalized & have policies & systems in place to assess various risks. The department is also responsible for the implementation of the Basel II Accord in Pakistan. The function & activities of Credit Information Bureau also falls within the domain of Banking Surveillance Department. The CIB collect credit data,
under section 25A of the Banking Companies Ordinance 1962, maintain its database & disseminate credit information to financial institutions online to facilitate their credit appraisal process.

Main Objectives

  • To ensure effective regulatory and supervisory oversight of Banks and DFIs.
  • To assess and review, periodically, performance and future outlook of banking system.
  • To monitor risk profiles of banks, to prescribe guidelines etc requiring banks & DFIs to put in place adequate Risk Management Systems
  • Developing detailed understanding of New Basle Capital Accord.
  • To ensure compliance with Basel Core Principles of Banking Supervision.
  • To provide online collection & dissemination of credit related information to financial institutions in order to facilitate their credit appraisal process.

Structure of the Department

1. Risk Management & Analysis Division

This Division is responsible for monitoring different risks faced/assumed by individual Banks/DFIs & prescribes policies/issues guidelines etc for managing/mitigating these risks.

2. Basel Accord & Core Principles Division

The primary objective of this division is to implement the Basel II Accord in the banking sector. This involves participating in capacity building of the banking industry to understand, adapt, & implement the Basel Accord & then to also monitor compliance in this regard. The other objective is to ensure compliance with Basel Core principles of banking

3. Banking Sector Assessment Studies Division

This division is primarily responsible for reviewing and assessing, on periodical basis, the banking system performance, and its future outlook. The division also conducts various stress testing exercises to assess the resilience of the banking sector to various shocks.

4. Credit Information Bureau (CIB)

Collects & disseminates credit data from & to financial institutions to facilitate their credit appraisal process. It maintains database of all borrowers who avail credit facilities from financial institutions & provides online access to financial institutions to submit monthly credit data & to generate CIB reports.

5. Coordination & Administration Unit

The primary objective of this division is to provide necessary support services to the Department’s staff and officers to facilitate them in effective & efficient discharge of assigned functions/ responsibilities. It coordinates with other departments & external organizations for timely provision of support services and technological assistance. It is also responsible for receipt/dispatch of correspondence & records of inward & outward mail, besides preparing a consolidated business plan for the department & its monitoring & follow up for effective implementation. The Division also coordinates on various training activities for imparting training to the staff/officers.

Training Programs by SBP

This much coordination among supervisory departments attempts to ensure stable & efficient banking system.

Economic Policy Department

Economic Policy Department is primarily engaged in eight fundamental activities. These include:

  • Preparation of Monetary Policy Statement
  • Preparation of Monetary Surveys
  • Preparation of Annual Credit Plan
  • Consultations with the IMF
  • Computation of REER index;
  • Computation of domestic public debt
  • Analysis of financial markets
  • Empirical research papers

The Department also deals with external sector issues and references on money, credit, and exchange rates management. For operational purposes, the Department has been divided into the following four groups:

1. Monetary Survey & IMF Consultations Group

  • This group is responsible for preparation of Monetary Survey, details of Government budgetary borrowings, commodity operations, bank credit to private sector, public sector enterprises including (major autonomous bodies) and other items separately for SBP and Scheduled banks.
  • This group is responsible for preparation of Monetary Survey, details of Government budgetary borrowings, commodity operations, bank credit to private sector, public sector enterprises including (major autonomous bodies) and other items separately for SBP and Scheduled banks.

In addition to this, the group is also assigned the task of preparation of material for IMF Consultations, World Bank and Ministry of Finance, monitoring of Performance Criteria and disposal of queries and references.

2. Money, Credit & Prices Group

  • The group is responsible for preparing credit plans, working papers & performs Secretariat work. Other assignments include credit targeting, credit monitoring, banking issues & reforms, Inflation watch, analysis of lending rates, large scale manufacturing developments & disposal of references on credit allocation.
  • The group also prepares periodic reports/reviews on Credit assessment of Private sector, credit assessment of govt. sector, analysis of tax revenue, domestic debt, & impact analysis of various policy initiatives. The group also intends to initiate work on micro credit and SMEs.

3. Financial Market & Exchange Rates Group

  • This group is responsible to keep constant watch & analyze developments in the financial markets
  • It prepares and supplies variety of background information for circulation in meetings.
  • Further, it is also assigned the task of dealing with the matters relating to exchange rate and foreign exchange reserves.

4. External Sector Group

The group deals with the matters relating to Pakistan’s relationship with International Financial Institutions like

  • IMF: International monetary fund.
  • IBRD: International Bank for Reconstruction & Development.
  • ADB: Asian development Bank.
  • The issues of WTO and SAARC FINANCE.