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SBP issues guidelines on CAR for banks and DFIs

KARACHI (November 26 2008): The State Bank of Pakistan on Tuesday announced reduction in the minimum Capital Adequacy Ratio (CAR) for banks and DFIs from 10 percent to 9 percent by the end of December 2008. This move allows banks to take on more risk-weighted assets.

— At present, manufacturing, agricultural and commodity sectors require sufficient financing from banks and DFIs

The idea of risk-weighted assets is a move away from having a static requirement for capital. Instead, it is based on the riskiness of a bank's assets. For example, loans that are secured by a letter of credit would be weighted riskier than a mortgage loan that is secured with collateral.

According to banking sources, the SBP's current move will enhance banks and DFIs lending ability to meet the financing requirements of different sectors besides providing an additional amount of Rs 5 billion for lending.

The sources said that at present manufacturing, agricultural and commodity sectors required sufficient financing from banks and DFIs, however banks were facing problems due to liquidity shortage and SBP's 10 percent CAR condition.

Earlier, on September 5, 2008 the SBP directed banks and DFIs to increase the minimum CAR requirement on consolidated as well as on stand alone basis by 2 percent to 10 percent by the end of December 31, 2008.

However, the SBP and industry experts were expecting that amid present financial crunch, banks and DFIs would not be able to achieve the 10 percent CAR condition by the end of December 2008.

Therefore, following the financing demand by the agricultural, industrial and commodity sector, the SBP has announced that it is making some changes in the CAR. Banking Surveillance Department of the SBP on Tuesday issued a BSD Circular No 30 to the Presidents/Chief Executives of all banks and DFIs.

“In view of the transition from Basel-I to Basel-II and to facilitate the banks/DFIs with the requirements of above referred Circular, it has been decided to change the CAR,” SBP said in circular. Banks and DFIs shall achieve the minimum Capital Adequacy Ratio (CAR) of 9 percent, instead of 10 percent on stand alone as well as consolidated basis, regardless of their CAMELS-S rating, latest by December 31, 2008.

However, the central bank has said that banks and DFIs shall achieve the minimum CAR of 10 percent and the requirement of variable CAR by December 31, 2009. The variable CAR requirement, based on the CAMELS-S ratings, will be advised to each bank/DFI separately in due course of time.

CAR calculations shall be based on Basel II and as per the guidelines issued by the State Bank of Pakistan from time to time in this regard, SBP said. Adding, “all other instructions, on the subject, shall remain the same”.

Sources said that small banks would be the major beneficiary of the central bank's move, as large banks already have over 10 percent CAR and these banks may not like to reduce it to 9 percent in view of implications of international rating agencies.

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