Banks Urged to Develop Comprehensive Credit Risk Management Framework
In an effort to strengthen its financial resilience and navigate various economic cycles, the State Bank of Pakistan has emphasized the need for banks to develop a comprehensive credit risk management framework.
Establishing Credit Policies and Procedures
According to the central bank’s guidelines, senior management must establish credit policies and procedures that provide guidance on various types of lending, including:
- Corporate lending
- SME (Small and Medium-sized Enterprise) lending
- Consumer lending
- Agriculture lending
- Others
These policies should include detailed and formalized credit evaluation processes, as well as mechanisms for ongoing credit administration and monitoring.
Credit Limit Setting
The guidelines also stress the importance of credit limit setting, stating that banks must establish exposure limits for:
- Single obligors
- Groups of connected obligors
based on their credit strength, economic conditions, and risk tolerance.
Focus on Debt Servicing Ability and Reputation
In addition, the central bank has warned against over-reliance on collaterals and covenants, urging banks to focus instead on the obligor’s:
- Debt servicing ability
- Reputation in the market
To ensure effective credit risk management, banks are advised to conduct thorough credit assessments of borrowers, taking into account their:
- Industry
- Macroeconomic factors
- Purpose of credit
- Repayment history
- Repayment capacity
Banks should also appraise the amount and timing of cash flows, as well as the financial position of the borrower and intended purpose of the funds.
Ongoing Credit Administration
The guidelines emphasize the importance of ongoing credit administration, including:
- Regular review of credit limits
- Documentation
- Monitoring of credit facilities to ensure compliance with approved terms and conditions
By developing a comprehensive credit risk management framework, banks can:
- Mitigate potential losses
- Improve their financial stability
- Better serve their customers in these uncertain economic times.