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Ms. Huma Ayub

 

 
 
½?Abid Khan
½?Agha Nawazish
½?Anum Khalid
½?uawwad Mir
½? hrish Mushtaq

!!"#?ººth Jun
20º0
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uirst and for most w ar thankful to Allah for giving us th mind to think
h art to f ll and
str ngth to compl t this r port.

W would also lik to thank our cours instructor
Maǯam Huma Ayub for h r advic and
sugg stions to this r port. Without th assistanc of h r
it would hav b n difficult and
stup ndous for our group with m ag r r sourc s at its disposal to accomplish it

W ar thankful to th r sp ctabl p rsonn l of Askari Bank Limit d and Bank Al-ualah

bank for th ir tim and ffort to provid us th ss ntial information
which h lp d to
compl t our proj ct succ ssfully. W ar sp cially thankful to th following mploy s of
th r sp ctiv banks
!%#&#"%
=? Mr. Khalil Chaudary (VP-H ad Cr dit Risk)
=? Mr. Haid r
=? Mr. Burhan Iftikhar
=? Ms. Huma Khalid
#"%'(#'#)
=? Mr. Z shan Tanv r
=? Mr. Zia Hanfi

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INTRODUCTION ............................................................................................................................................................ º

PROBLEM TATEMENT ............................................................................................................................................ 3

LITERATURE REVIEW ............................................................................................................................................... 4

METHODOLOGY ......................................................................................................................................................... º0

uINDING ...................................................................................................................................................................... ºº

AKARI BANK ......................................................................................................................................................... ºº

BANK ALuALAH ..................................................................................................................................................... º

RECOMMENDATION ............................................................................................................................................. 23

CONCLUION ............................................................................................................................................................... 25

BIBLIOGRAPHY .......................................................................................................................................................... 26?


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uigur º Risk Manag m nt uram work ............................................................................................................. i
uigur 2: Compon nts of R gulatory Capital of ABL ................................................................................... ii
uigur 3 Capital Ad quacy Ratio ..........................................................................................................................iii
uigur 4 Cr dit Risk Exposur .............................................................................................................................. iv
uigur 5 Loan Classification And Provisioning ............................................................................................. iv

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A comm rcial bank acts an int rm diary b tw n surplus units ( ntiti s having xc ss of
fund) and d ficit units ( ntiti s in n d of funds). Th ss ntiality of a comm rcial bank for
a country cannot b d scrib d nough as it plays various rol s
for instanc it also plays an
important rol in nhancing conomic conditions of th country by allowing p opl to
ngag in various conomic activiti s using borrow d funds. Banks ar a fundam ntal
compon nt of th financial syst m
and ar also activ play rs in financial mark ts.
Th r for it is important to nsur saf ty and soundn ss of financial syst m of th country
by putting up param t rs for banks.

Capital risk is clos ly ti d to th ass t quality and a bank's ov rall risk profil . Banks and
financial institutions ar fac d with long-t rm futur unc rtainti s
which th y int nd to
account for. It is in this cont xt that th Bas l Accords w r cr at d
aiming to nhanc th
risk manag m nt functions of banks and financial institutions. Bas l II provid s dir ctiv s
on th r gulatory minimum amount of capital that banks should hold against th ir risks

such as cr dit risk
mark t risk
op rational risk and oth rs. Basically
capital provid s a
cushion for banks to absorb loss s and also provid s r ady acc ss to financial mark ts

guards against liquidity probl ms. Th mor risk tak n
th gr at r is th amount of capital
r quir d. To hold mor capital m ans forcing banks to hav mor of th ir own funds at risk.
Ev n a bank's divid nd policy aff cts its capital risk by influ ncing r tain d arnings. o
managing th capital risk through diff r nt t chniqu s is th important conc rn of th
bank.

#!' is th s cond of th Bas l Accords
which ar r comm ndations on banking laws
and r gulations issu d by th Bas l Committ on Banking up rvision. Th purpos of
Bas l II
which was initially publish d in Jun 2004
is to cr at an int rnational standard
that banking r gulators can us wh n cr ating r gulations about how much capital banks
n d to put asid to guard against th typ s of financial and op rational risks banks fac .
Advocat s of Bas l II b li v that such an int rnational standard can h lp prot ct th
int rnational financial syst m from th typ s of probl ms that might aris should a major
bank or a s ri s of banks collaps . In practic
Bas l II att mpts to accomplish this by
s tting up rigorous risk and capital manag m nt r quir m nts d sign d to nsur that a
bank holds capital r s rv s appropriat to th risk th bank xpos s its lf to through its
l nding and inv stm nt practic s. G n rally sp aking
th s rul s m an that th gr at r
risk to which th bank is xpos d
th gr at r th amount of capital th bank n ds to hold
to saf guard its solv ncy and ov rall conomic stability.

÷
????
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uinancial stability xists wh n th financial syst m is r sili nt to a wid rang of conomic
and financial shocks
and abl to absorb financial crisis loss s with l ast disruption. It
cannot b mphasiz d nough that th soundn ss and ffici ncy of banks to manag
various risk including th capital risk which is important as it matt rs a lot for financial
stability. Th r for
in Pakistan
Bas l Accords r comm ndations ar nforc d by tat
Bank of Pakistan in th ir guid lin s that ar provid d to th banking industry so that
comm rcial banks can tailor th ir op rations accordingly. W can s that this syst m is
ff ctiv in many ways.

Th purpos of this proj ct is to s impl m ntation of Bas l II in form of BP r gulations

in comm rcial banks and s how it ff ctiv ly manag s its capital by mitigating th risks
associat d with all bank busin ss s with sp cial mphasis on cr dit risk. W hav chos n
two banks that ar succ ssfully working with risk manag m nt fram work as pr scrib d
by BP: Askari Bank Limit d and Bank Al-ualah. W will look into th ir capital manag m nt
t chniqu s with thorough study of th ir cr dit risk mitigation.



? 

÷
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DzTo find out how Askari and Alfalah Bank manag s th capital risk and what
typ of t chniqu s th y us s for cr dit risk valuation and ass ssm nt as to
mitigat th ir cr dit risk xposur 
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Risks ar usually d fin d by th adv rs impact on profitability of s v ral distinct sourc s

of unc rtainty. Whil th typ s and d gr of risks an organization may b xpos d to
d p nd upon a numb r of factors such as its siz
compl xity busin ss activiti s
volum
tc
it is b li v d that g n rally th banks fac Cr dit
Mark t
Liquidity
Op rational

Complianc / l gal /r gulatory and r putation risks. B for ov rarching th s risk
cat gori s
giv n b low ar som basics about risk Manag m nt and som guiding
principl s to manag risks in banking organization.º

Banks ar invariably fac d with diff r nt typ s of risks that may hav a pot ntially n gativ
ff ct on th ir busin ss. Risk manag m nt in bank op rations includ s risk id ntification

m asur m nt and ass ssm nt
and its obj ctiv is to minimiz n gativ ff cts risks can
hav on th financial r sult and capital of a bank. Banks ar th r for r quir d to form a
sp cial organizational unit in charg of risk manag m nt. Also
th y ar r quir d to
pr scrib proc dur s for risk id ntification
m asur m nt and ass ssm nt
as w ll as
proc dur s for risk manag m nt.

In v ry financial institution
risk manag m nt activiti s broadly tak plac simultan ously
at following diff r nt hi rarchy l v ls.


&#*+ ',' It ncompass s risk manag m nt functions p rform d by s nior

manag m nt and BOD. uor instanc d finition of risks
asc rtaining institutions risk
app tit
formulating strat gy and polici s for managing risks and stablish ad quat
syst ms and controls to nsur that ov rall risk r main within acc ptabl l v l and th
r ward comp nsat for th risk tak n.
i

#+& ,': It ncompass s risk manag m nt within a busin ss ar a or across
busin ss lin s. G n rally th risk manag m nt activiti s p rform d by middl manag m nt
or units d vot d to risk r vi ws fall into this cat gory.
ü

+&,': It involv s ǮOn-th -lin ǯ risk manag m nt wh r risks ar actually cr at d.
This is th risk manag m nt activiti s p rform d by individuals who tak risk on
organizationǯs b half such as front offic and loan origination functions. Th risk
manag m nt in thos ar as is confin d to following op rational proc dur s and guid lin s
s t by manag m nt.

?????????????????????????????????????????????????????????????

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Dat Visit d: May 25th
20º0?

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Th risks to which a bank is particularly xpos d in its op rations ar : liquidity risk
cr dit
risk
mark t risks (int r st rat risk
for ign xchang risk and risk from chang in mark t
pric of s curiti s
financial d rivativ s and commoditi s)
xposur risks
inv stm nt
risks
risks r lating to th country of origin of th ntity to which a bank is xpos d

op rational risk
l gal risk
r putational risk and strat gic risk.2

 -

urom º
65 to º
º th r w r about ight bank failur s (or bankruptci s) in th Unit d
tat s. Bank failur s w r particularly promin nt during th '0s
a tim which is usually
r f rr d to as th "savings and loan crisis". Banks throughout th world w r l nding
xt nsiv ly
whil countri s' xt rnal ind bt dn ss was growing at an unsustainabl rat .

As a r sult
th pot ntial for th bankruptcy of th major int rnational banks b caus gr w
as a r sult of low s curity. In ord r to pr v nt this risk
th Bas l Committ on Banking
up rvision
compris d of c ntral banks and sup rvisory authoriti s of º0 countri s
m t in
º
 in Bas l
witz rland. Th Bas l Committ consists of r pr s ntativ s from c ntral
banks and r gulatory authoriti s of th Group of T n countri s
plus oth rs (sp cifically
Lux mbourg and pain). Th committ do s not hav th authority to nforc
r comm ndations
although most m mb r countri s (and oth rs) t nd to impl m nt th
Committ 's polici s. This m ans that r comm ndations ar nforc d through national (or
EU-wid ) laws and r gulations
rath r than as a r sult of th committ 's
r comm ndations - thus som tim may pass b tw n r comm ndations and
impl m ntation as law at th national l v l.3

Th committ draft d a first docum nt to s t up an int rnational 'minimum' amount of

capital that banks should hold. This minimum is a p rc ntag of th total capital of a bank

which is also call d th minimum risk-bas d capital ad quacy. In º

th Bas l I Capital
Accord (agr m nt) was cr at d. Th Bas l II Capital Accord follows as an xt nsion of th
form r
and should b impl m nt d in 200 . In this articl
w 'll tak a look at Bas l I and
how it impact d th banking industry as it nt rs th Bas l II phas .

) &.!/#!'
In º

th Bas l I Capital Accord was cr at d. Th g n ral purpos was to:
º. tr ngth n th stability of int rnational banking syst m.

?????????????????????????????????????????????????????????????

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 l
Dat Visit d: May 25th
20º0

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Dat Visit d: May 2 th
20º0?

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2.  t up a fair and a consist nt int rnational banking syst m in ord r to d cr as
comp titiv in quality among int rnational banks.

Th basic achi v m nt of Bas l I hav b n to d fin bank capital and th so-call d bank
capital ratio. In ord r to s t up a minimum risk-bas d capital ad quacy applying to all
banks and gov rnm nts in th world
a g n ral d finition of capital was r quir d. Ind d

b for this int rnational agr m nt
th r was no singl d finition of bank capital. Th first
st p of th agr m nt was thus to d fin it.

0(&c#.#'
Bas l I d fin capital bas d on two ti rs:

º. Ti r º (Cor Capital): Ti r º capital includ s stock issu s (or shar hold rǯs quity) and
d clar d r s rv s
such as loan loss r s rv s s t asid to cushion futur loss s or for
smoothing out incom variations.
2. Ti r 2 (uppl m ntary Capital): Ti r 2 capital includ s all oth r capital such as gains on
inv stm nt ass ts
long-t rm d bt with maturity gr at r than fiv y ars and hidd n
r s rv s (i. . xc ss allowanc for loss s on loans and l as s).

In º

6 th Bas l I agr m nt was r vis d to incorporat mark t risk. As a r sult
th n w

d finition of capital ratio is d fin d as: Mark t risk includ s g n ral mark t risk and
sp cific risk. Th g n ral mark t risk r f rs to chang s in th mark t valu s du to larg
mark t mov m nts. p cific risk r f rs to chang s in th valu of an individual ass t du to
factors r lat d to th issu r of th s curity. Th r ar four typ s of conomic variabl s that
g n rat mark t risk. Th s ar int r st rat s
for ign xchang s
quiti s and
commoditi s. Th mark t risk can b calculat d in two diff r nt mann rs: ith r with th
standardiz d Bas l mod l or with int rnal valu at risk (VAR) mod ls of th banks. Th s
int rnal mod ls can only b us d by th larg st banks that satisfy qualitativ and
quantitativ standards impos d by th Bas l agr m nt. Mor ov r
th º

6 r vision also
adds th possibility of a third ti r for th total capital
which includ s short-t rm uns cur d
d bts. This is at th discr tion of th c ntral banks.

/#''!/#!'
Bas l I Capital Accord has b n criticiz d on s v ral grounds. Th main criticisms includ
th following:

=? //&"#"/+&&!%
Th r ar four broad risk w ightings (0%
20%
50% and º00%)
as shown in
uigur º
bas d on an % minimum capital ratio.
=? #+#!&//#'&!%
÷
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 Th assumption that a minimum % capital ratio is suffici nt to prot ct banks from
failur do s not tak into account th changing natur of d fault risk.
=? &+*""/&(!&+&/+&&!%
Th capital charg s ar s t at th sam l v l r gardl ss of th maturity of a cr dit
xposur .
=? .'/+#'+'#"/."#'/&+"&.#& &!%
Th curr nt capital r quir m nts ignor th diff r nt l v l of risks associat d with
diff r nt curr nci s and macro conomic risk. In oth r words
it assum s a common
mark t to all actors
which is not tru in r ality.
=? #+%/&+*""/.&/',&!/+#"//+!
In r ality
th sum of individual risk xposur s is not th sam as th risk r duction
through portfolio div rsification. Th r for
summing all risks might provid
incorr ct judgm nt of risk. A r m dy would b to cr at an int rnal cr dit risk
mod l - for xampl
on similar to th mod l as d v lop d by th bank to calculat
mark t risk. This r mark is also valid for all oth r w akn ss s.
Th s list d criticisms hav l d to th cr ation of a n w Bas l Capital Accord
known
as Bas l II
which adds op rational risk and also d fin s n w calculations of cr dit
risk. Op rational risk is th risk of loss arising from human rror or manag m nt
failur .4



Bas l Committ on Banking up rvision (BCB) finaliz d th N w Capital Ad quacy
fram work commonly known as Bas l II in Jun 2004. This n w capital ad quacy r gim
off rs a compr h nsiv and mor risk s nsitiv capital allocation m thodology for major
risk cat gori s. Bas l II fram work compris s of thr parts r f rr d to as thr pillars of
th Accord; Pillar I
which is about minimum capital r quir m nt
pr scrib s th capital
allocation m thodology against cr dit and op rational risks. Th capital r quir m nt for
Mark t risk r mains th sam as nvisag d und r Bas l I in º

6. Th risks
which ar not
captur d und r pillar I
ar cov r d in pillar II. Pillar II of th N w Accord outlin s th
sup rvisory r vi w proc ss of th capital ad quacy of banks. It r quir s banks to stablish
a robust risk manag m nt fram work to id ntify
ass ss and manag major risks inh r nt
in th institution and allocat ad quat capital against thos risks. Th sup rvisor has to
r vi w th ad quacy of risk manag m nt function and capital allocation m chanism
against major risks including thos that ar not cov r d und r pillar I i. . Liquidity Risk

Conc ntration risk
Int r st rat Risk in Banking Book tc. and nsur s it comm nsurat
with th siz and natur of busin ss of th institution. Th pillar 3 of th Accord s ts out
disclosur r quir m nt d p nding upon which particular approach of Pillar I th
?????????????????????????????????????????????????????????????

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Dat Visit d: May 25th
20º0?

÷
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institutions adopt for calculating Minimum Capital R quir m nt. Th N w Capital Accord is
not mandatory v n for th m mb r countri s of th BCB. How v r
th r is cons nsus
among m mb r countri s to adopt Bas l II standardiz d approach by th nd of 2006 and
advanc approach s by 200 . Among Non M mb r countri s Bas l II is xp ct d to b
adopt d by most of th conomi s in 200 or lat r on.

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Th Bas l I had a numb r of flaws. uor instanc
it provid d Dzon siz fit all approach and
did not diff r ntiat b tw n ass ts having l ss risk and ass ts having high r risk. Th r
was no capital allocation against op rational risk as w ll as no consid ration was giv n to
oth r risks such as conc ntration risk
liquidity risk tc. Th n w accord has risk
manag m nt mb dd d in it; so it will b a driving forc for bringing improv m nt in risk
manag m nt capabiliti s of banks. Bas l II provid s inc ntiv to banks having good risk
manag m nt and punish s thos that ar not managing th ir risk profil appropriat ly by
r quiring high r capital.

On th basis of for going and k ping in vi w th global r spons towards Bas l II
BP has

in principl
d cid d to adopt Bas l II in Pakistan. Th nsuing pag s outlin a propos d
Roadmap for th impl m ntation of Bas l II in Pakistan. Whil pr paring this Roadmap
th
tat Bank has conduct d a surv y to ass ss th xisting capacity of th banks and th ir
financial position to m t additional capital r quir m nt. Th plans of oth r countri s for
adoption of Bas l II hav also b n r vi w d. Efforts hav b n mad to draw a r alistic
tim lin so as to giv banks suffici nt tim to pr par th ms lv s for m ting th
r quir m nt of Bas l II.5

 
  c

 
 

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It is hard to diff r ntiat b tw n th traditional approach and th n w approach s sinc

many of th id as of traditional mod ls ar us d in th n w mod ls. Th traditional
approach is compris d of four class s of mod ls

=? 2.& !!
In th xp rt syst m
th cr dit d cision is l ft in th hands of th branch l nding offic r.
His xp rtis
judgm nt
and w ighting of c rtain factors ar th most important
d t rminants in th d cision to grant loans. th loan offic r can xamin as many points as
?????????????????????????????????????????????????????????????

?www.sbp.org.pk/bsd/2005/C3_ROADMAP-Bas l.pdf ??
Dat Visit d: May º th
20º0?

÷
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possibl but must includ th fiv DzCs th s ar ; charact r
cr dibility
capital
collat ral
and cycl ( conomic conditions) in addition to th 5 Cs
an xp rt may also tak into
consid ration th int r st rat .

=? &/+#' &#' 0&%!

Du to th tim consuming natur and rror- pron natur of th comput riz d xp rtis
syst m
many syst ms us induction to inf r th human xp rtǯs d cision proc ss. Th
artificial n ural n tworks hav b n propos d as solutions to th probl ms of th xp rt
syst m. This syst m simulat s th human l arning proc ss. It l arns th natur of th
r lationship b tw n inputs and outputs by r p at dly sampling input/output information.

=? "&"#'#"*##"%!
Ov r th y ars
banks hav subdivid d th pass/p rforming rating cat gory
for xampl at
ach tim
th r is always a probability that som pass or p rforming loans will go into
d fault
and that r s rv s should b h ld against such loans.

=? c&+&"* !!
A cr dit scor is a numb r that is bas d on a statistical analysis of a borrow rǯs cr dit
ºr port
and is us d to r pr s nt th cr ditworthin ss of that p rson. A cr dit scor is
primarily bas d on cr dit r port information. L nd rs
such as banks us cr dit scor s to
valuat th pot ntial risk pos d by giving loans to consum rs and to mitigat loss s du to
bad d bt. Using cr dit scor s
financial institutions d t rmin who ar th most qualifi d
for a loan
at what rat of int r st
and to what cr dit limits (Wikip dia
200). 6

c""*"+ .'#"""*: Institutions should hav a m chanism to id ntify str ss situations

ah ad of tim and plans to d al with such unusual situations in a tim ly and ff ctiv
mann r. tr ss situations to which this principl appli s includ all risks of all typ s. uor
instanc conting ncy planning activiti s includ disast r r cov ry planning
public
r lations damag control
litigation strat gy
r sponding to r gulatory criticism tc. ?

?????????????????????????????????????????????????????????????

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ë 
  
Dat Visit d: May 25th
20º0
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As to conduct our proj ct r s arch
w will us both primary and s condary data

3
V? Two banks
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V? Int rn t
V? N ws Articl s

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V? Int rvi w with Bank Manag rs.

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Askari Bank Limit d tak s prid in b ing on of th comm rcial banks in Pakistan that is
ff ctiv ly managing risk through an ffici nt risk manag m nt fram work. Th Bank
striv s to à

ü 


  


 




 


i


i. (Risk manag m nt fram work can b r f rr d in Ann xur ; figur º)
According to th Annual R port of 200

Askari Bank njoys th ntity rating:
"*&
)&&-4



 
 

Th Bank has provid d an ov rvi w of th ir risk manag m nt in th ir annual r port. Risk
Manag m nt is a cor function at th Bank that p rforms critical activiti s of m asuring

monitoring
controlling and r porting cr dit
mark t
liquidity
op rational and oth r risks.
Th risk manag m nt fram work of th Bank cov rs (i) risk polici s and limits structur

(ii) risk infrastructur and (iii) risk m asur m nt m thodologi s.

In th Annual R port of 200

th Bank outlin s its Capital Risk manag m nt as follows:

c 5c

+./..'+#"!
tandardiz d Approach is us d for calculating th Capital Ad quacy for Mark t and Cr dit
risk whil Basic Indicator Approach (BIA) is us d for Op rational Risk Capital Ad quacy
purpos .
Th Bank has two subsidiari s
Askari Inv stm nt Manag m nt Limit d (AIML) and Askari
 curiti s Limit d (AL). AIML is th wholly-own d subsidiary of Askari Bank Limit d
whil AL is 4% own d by th Bank. Both th s ntiti s ar includ d whil calculating
Capital Ad quacy for th Bank using full consolidation m thod. Th fact that Askari Bank
has n ith r any significant minority inv stm nts in banking
s curiti s
or any oth r
financial ntiti s nor do s it has any majority or significant minority quity holding in
insuranc xclud s it from a n d for furth r consolidation. uurth rmor
th Bank do s
not indulg in any s curitization activity that shi lds it from th risk inh r nt in
s curitization.

Th risk-w ight d ass ts ar d t rmin d according to sp cifi d r quir m nts of th tat

Bank of Pakistan that s k to r fl ct th varying l v ls of risk attach d to on-balanc sh t

÷
????
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and off-balanc sh t xposur s. Th total risk-w ight d xposur s compris th cr dit
risk
mark t risk and op rational risk.

 .!/2.!&!#"c!!
?
uor dom stic claims
ECAIs r comm nd d by th tat Bank of Pakistan (BP)
nam ly
Pakistan Cr dit Rating Ag ncy Limit d (PACRA) and JCR-VI Cr dit Rating Company
Limit d (JCR-VI) w r us d. uor for ign curr ncy claims on sov r igns
risk w ights w r
assign d on th basis of th cr dit ratings assign d by Moodyǯs. uor claims on for ign
ntiti s
rating of P
Moodyǯs
and uitch Ratings w r us d. uor ign xposur s not rat d
by any of th afor m ntion d rating ag nci s w r cat goriz d as unrat d.
Typ of xposur s for which ach ag ncy is us d in th y ar nd d 200
is pr s nt d b low

c#.#'#6#+ &##!#+&7-89::;

Th capital to risk w ight d ass ts ratio
calculat d in accordanc with th tat Bank of
Pakistanǯs guid lin s on capital ad quacy
using Bas l II standardiz d approach s for cr dit
and mark t risks and basic indicator approach for op rational risk is pr s nt d in uigur 2
 3 in Ann xur .

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!
?http://www.askaribank.com.pk/R ports/Askari%20uinancials%20200
.pdf
 ??'(?#)?##??

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#&% !%
#"#*" .#&": This d partm nt d v lops and impl m nts th
mark t risk policy and risk m asuring / monitoring m thodology
and r vi ws and r ports
mark t risk against r gulatory and int rnal limits. Basically this d partm nt d als with risk
r lat d to bankǯs inv stm nts for .g. tr asury bills
pr f r nc shar s tc.

.&#"#'!%
#"#*"< 
=.#&": it has b n stablish d to incr as

th ffici ncy and ff ctiv n ss of th Bankǯs r sourc s
minimiz loss s and utiliz
opportuniti s. This d partm nt d als with risk r lat d to bankǯs day to day op rations such
as Account Op ning
uraud cas s tc.

Cr dit Risk D partm nt is furth r divid d into two d partm nts.

=? Post uacto R vi w
=? Bas l Impl m ntation.
Th rol of th subdivisions will b discuss d lat r in d tail as th y ar main scop of
proj ct.

'+  .#&" it is r sponsibl for formulation of polici s in light of all th bank

busin ss risks pr vailing. Th s polici s ar mad in discussion and r sults ar
communicat d to Country H ad for approval. Onc th polici s hav b n approv d
th s
ar communicat d across th r sp ctiv D partm nts.

   c $>

   
?
#!'.'"#",!"?
During th Int rvi ws
this is how th cr dit risk d partm nt vi ws th significanc and
ff ctiv n ss of Bas l Accord II: In arli r tim s
banks w r l nding on th basis of
d posits: l nding ratio
m aning th banksǯ l nding d cision and calculations w r bas d
on its d posit bas . Bank of Int rnational  ttl m nts (BI) took th initiativ of making
l nding activiti s mor sophisticat d with mor mphasis on risk mitigation in t rms of
cr dit risk; this l d to th formulation of Bas l Accords.

Bas l Accord II is a mor cons rvativ m thod to mitigat cr dit risk which r quir s banks
to k p ch ck on cr dit
op rational and mark t risk to manag its capital. Bas l Accord II
r stricts th risk to b born by d positors to minimum l v l arising from th banksǯ l nding
activiti s. It r quir s banks to shar risk by inj cting its own capital wh n inv sting in
riski r ass ts in form of loans and advanc s.

Th typ of capital b ing maintain d at Askari Bank Limit d is r gulatory capital
and as th
nam impli s
it is r gulat d by th C ntral Bank (BP). Th Bank is r quir d to quantify
risk w ight d ass ts and s t asid capital according to th risk bank und rtak s.

÷
????
?
Bas l Impl m ntation Division is r sponsibl for:
=? Impl m ntation of Bas l Accords
mainly Bas l Accord II in l nding activiti s
and
=? Calculations of Capital Ad quacy Ratio bas d on guid lin s of BP.
Wh n th d partm nt r c iv s th r port for loan r qu st
th first st p is to cat goriz it
in any on of th following:
=? R tail portfolio
=? Mortgag
=? Corporat
=? Public/ s ctor nt rpris (PE)
=? Gov rnm nt
=? Past du xposur

Th tr atm nt of ach cat gory is uniqu ly d sign d by th Bank und r th BP guid lin .
Th d partm nt th n ch cks th collat ral. A f w xampl s of th collat ral tak n by th
bank as sp cifi d by th BP ar :
=? Cash margins or d posit
=? Gold r s rv s
=? Gov rnm nt s curiti s

Th bank th n calculat s th Risk W ight d Ass ts= Exposur Ȃ Eligibl Collat ral. By
clubbing all th s risk w ight d ass ts
th d partm nt calculat s th capital it n ds to s t
asid . Th Cr dit Risk xposur of 200
is in figur 3: c
 ?
?  ??

 ??
  ? ?  ?   ?c
 ?
?

?
?
?



?

This division is r sponsibl for monitory of th loans disburs d. Th y us diff r nt mod ls

to analyz th p rformanc of loans. Th mod ls conduct quantitativ analysis by ch cking
profits
tr nd analysis of Cash ulows and so
as w ll as qualitativ analysis by ch cking
manag m nt practic s and p rformanc . Th bank giv s mor w ight ag to qualitativ
m asur s as it provid s an insight into th charact r of ntity
for .g.
do s th borrow r
int nd to r pay th loan.

Th Post uacto R vi ws for borrow rs ar don aft r r gular int rvals to know about th
curr nt position. Bas d on th r sults of various analys s
th division rais s alarm if it
cit s probl ms in th loan p rformanc
and futur cours of action with th custom r is
plann d. uor xampl
Bank is now r stricting its cr dit faciliti s to T xtil s ctor to rar
cas s
sinc it has b n mov d from low risk to high risk du to gr at r no. of NPLs arising

÷
????
?
from r c nt v nts lik strik s
d clin in t xtil p rformanc
fluctuating gov rnm nt
polici s tc.

 
 c

 ? c 

According to Askari Bank
diff r nt nvironm ntal factors hav a dir ct whil som hav
indir ct impact on cr dit risk for bank:
=? uluctuating Gov rnm nt polici s: fluctuations in gov rnm nt polici s hit many
s ctors badly
r nd ring th m incapabl to r pay loans
l ading to incr as in NPLs.
=? En rgy Crisis: this has l d to d t rioration in p rformanc of many on -tim l ading
and favorabl ntiti s to provid cr dit lik T xtil  ctor.
=? Inflation: burd n of individuals/ corporations tc. incr as
th y ar lik ly to d fault.
=? Un mploym nt: downsizing
limit d job opportuniti s and so l ads to inability to
pay off loans.

 
 c

    c 

As Askari Bank has a d c ntraliz d syst m
probl m oft n aris s from Manag m nt
Information yst m to gath r data from all sourc s that l ads to probl ms in calculating
CAR. It may happ n that information from som d partm nts mayb d lay d
or r ports
may hav flaws; data coll ction and proc ssing of bulk of data tak s tim
and bank oft n
fac s tim constraint in submitting th Capital Ad quacy r turn r port r quir d by BP at
r quir d tim du to th s factors.



@ cccc      

This is don as p r th typ of facility and according to BPǯs r gulation. uor xampl
if
bank has l nt cr dit for auto loans
according to BP guid lin s th loan shall b classifi d
and provisioning shall b mad according to uigur 4 in Ann xur .


 
  


@c 5c 

 

Askari Bank has mbark d upon a major initiativ of ov rhauling its t chnology
infrastructur with th aim of upgrading busin ss and op rational capabiliti s whil
improving quality of custom r s rvic .
uor this purpos
fiv n w softwar application products hav b n acquir d and ar
curr ntly in diff r nt stag s of impl m ntation. On of th s includ s a Risk Manag m nt
yst m. Th bank is in proc ss of impl m nting IuLEX DzR v l us
risk manag m nt
softwar of Oracl financial  rvic s olution
having th ability to g n rat liv Capital
Ad quacy Ratio and at day nd g n rat r port.
÷
????
?
Th k y f atur s of this product includ :
=? Pr -configur d r ports cov ring Pillar I and Pillar II r porting
=? Enabl s tabular as w ll as graphical r porting
=? Drill-through functionality allows for d tail d analysis
=? Risk m asur s and capital numb rs display d as point in- tim valu s
tr nds
h at
maps
distributions tc.
=? M trics display d across multipl l v ls and risk cat gori s



? 

?????????????????????????????????????????????????????????????
%
?http://www.askaribank.com.pk/R ports/Askari%20uinancials%20200
.pdf
http://www.oracl .com/us/industri s/financial-s rvic s/046223.pdf
Dat Visit d: Jun th
20º0?

÷
????
?


?
Bank Alfalah manag s th capital as to saf guard its ability to absorb larg un xp ct d
loss s and to prot ct d positors and oth r claim hold rs. It is th policy of th bank to
maintain a strong capital bas so as to maintain inv stor
cr ditor
and mark t confid nc
and to sustain futur d v lopm nt of th busin ss. PACRA
a pr mi r rating ag ncy of th
country
has rat d th bank ǮAAǯ (doubl A)
Entity Rating for long t rm and Aº (A on
plus) for th short t rm.

  
  c 

Th goals of managing capital of th Bank ar as follows:

=? To b an appropriat ly capitaliz d institution
consid ring th r quir m nts s t by
th r gulators of th banking mark ts wh r th Bank op rat s
=? Maintain strong ratings and to prot ct th Bank against un xp ct d v nts
=? Availability of ad quat capital at a r asonabl cost so as to nabl th Bank to
op rat ad quat ly.



 
 

Bank Alfalah has in plac an approv d int grat d risk manag m nt fram work for
managing cr dit risk
mark t risk
liquidity risk and op rational risk und r risk
manag m nt policy and risk manag m nt and int rnal control manual according to BP
pr scription. In it
th risk awar n ss cultur is b ing ncourag d by communicating th
principl s of prop r risk manag m nt to all bank mploy s.
?
uollowing is th gov rnanc structur and important polici s on risk manag m nt of th
bank

=? Th board of dir ctors through sub committ call d board risk manag m nt
committ (BRMC) ov rs s th ov rall risk of bank

=? Risk Manag m nt Division (RMD) is th organizational arm p rforming th

functions of id ntifying m asuring monitoring and controlling th various risks and
assists oth r various sub committ s in conv rsion of polic s into action.

=? As part of its mandat th c ntral manag m nt committ is ntrust d with

ov rs ing th op rational risk of th bank.

÷
??!??
?
 =? Aft r r vi wing th Bas l II
th bank has xclusiv ly pursu d th impl m ntation of
Bas l II with th h lp of xt rnal consultants and has compil d with all pillars
r quir m nts of Bas l II.

=? In th light of BP circulars and guid lin s
significant progr ss has also b n mad
in r sp ct of advanc approach s of Bas l II.

=? Th bank has acquir d t m nos T24 banking syst m as its cor banking solutions
and its risk manag m nt syst m call d T-Risk us d for managing cr dit mark t and
op rational risk.

=? A watch list proc dur is also functioning which id ntifi s loans showing arly
warning signals of b coming non-p rforming.

c

 
?
uor managing th cr dit risk und r th r gulatory capital
Bank Alfalah has d v lop d a
proc dural manual and proc ss s that hav b n s t for fin -tuning syst ms and
proc dur s
informational t chnology capabiliti s and risk gov rnanc structur as to m t
th advanc d approach s as w ll. uor th impl m ntation of Bas l II advanc approach s

bank is consid ring appointm nt of a consultant firm to assist it in this r gard.

Mor ov r
Cr dit Risk D partm nt looks aft r all th asp cts of cr dit risk and H ad of th
Cr dit Risk D partm nt r ports dir ctly to th G n ral Manag r (GM) in Risk Manag m nt
Division.

uollowing ar som m asur s th Bank Alfalah conducts b for acc pting th loan r qu st
as to mitigat cr dit risk.
=? Know your custom r
=? Purpos of l nding
=? uinancial stat m nts including ratio analysis
=? Working styl : wh th r th custom rs do busin ss on cr dit or cash?
=? As to know th int grity of th custom r th y ch ck th CIB r port which provid a
consolidat d pictur of a borrow r as of a giv n dat bas d on th information/data
suppli d by th banks.
=? Mark t r putation
=? D bt history tc




÷
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?
#"#&A..&#+)"&"#'#"*#!
Bank Alfalah us s both approach s.

#"#&A..&#+)
Th bank
as p r tat Bank of Pakistanǯs guid lin
has migrat d to Bas l II as on January
0º
200
with tandardiz d Approach. o for th purpos of stimating cr dit risk
w ight d ass ts
th Bank Alfalah limit d is using standard approach of BP Bas l II accord.

=? Und r th standardiz d approach
th y d t rmin d th risk w ights by th cat gory

of borrow r with risk w ights bas d on th xt rnal cr dit ratings (with un-rat d
cr dits assign d to th º00% risk buck t).
=? Thos  ?
? ? 
?c ?should b auth ntic and should b
thos as pr scrib d by th tat Bank of Pakistan.? ! ? "c#? $c%&#?
' #?(
? ?  ?)?" *?
=? ( ?
 ?+?  ? ,?? ? ? ? ? ? #? ?? ?-??


 -?  ? 
? ? ? +? ? , ?  ? ? 
 ? +?   ? ,?
 ? ? ? #? ?? ?? *??
=? ?? ?+ ? ? -  #?? +??
? ?+?? ??
? ? #??
? +? ??
*??

 .!/2.!&!#"c!!
uor for ign curr ncy claims on sov r igns
risk w ights w r assign d on th basis of th
cr dit ratings assign d by Moodyǯs. Typ of xposur s for which ach ag ncy is us d in th
y ar nd d 200
is pr s nt d b low




"&"#'#"*#!

A sophisticat d Int rnal Cr dit Rating yst m has b n d v lop d by th bank which is
capabl of m asuring count r party risk in accordanc with b st practic s. Th syst m
tak s into consid ration qualitativ and quantitativ factors of th count r party and
g n rat s an int rnal rating of that count r party. Th syst m has b n statistically t st d

validat d and ch ck d for complianc with th tat Bank of Pakistanǯs guid lin s for
Int rnal Cr dit Rating. Th syst m is back d by s cur d databas with back up support and

÷
??&??
?
is capabl of g n rating MI r port providing snapshot of th ntir portfolio for d cision
making. This syst m supports th Int rnal Rating Bas d Approach.

Und r th Int rnal Rating yst m
th bank is allow d to monitor risk of count rparti s
against diff r nt grad /scor s ranging from º-º2 (º b ing b st and º0-º2 for d fault rs.
Diff r nt variabl s hav b n id ntifi d according to which scor s ar mark d. Lik
busin ss op ration
history
l gal ntity
mark t r putation tc.

Th y hav introduc d th Int rnal Rating Bas d
b caus of two r asons

=? Bank Alfalah l nds mon y to th individual
ME
comm rcial and corporat firms. It
rang s from small to big firms th r for bank is of th vi w that not all of th firms
or individuals can g t rat d from xt rnal cr dit rating ag nci s as th y ar v ry
xp nsiv .
=? Mor ov r
th y canǯt r ly only on th xt rnal cr dit rating ag nci s.

c''#&#'

Th bank d fin s th collat ral as th ass ts or right provid d to th bank by th borrow r

or a third party in ord r to s cur a cr dit facility. Alfalah Bank r duc s its xposur und r
th particular transaction by taking into account th risk mitigating ff ct of th collat ral.

=? Valu of collat ral should b high r than th loan amount.

=? G n rally amount of loan that Bank Alfalah l nds should not xc d th 60%
of th valu of th collat ral.
=? Collat ral is r valu d at l ast v ry thr or six months.
.

B!"/c''#&#'

c.&)"!,..&#+)
As stipulat d in th BP Bas l II guid lin s
th bank us s th compr h nsiv approach for
collat ral valuation. Und r this approach
th bank r duc s its cr dit xposur to
count rparty wh n calculating its capital r quir m nts to th xt nt of risk mitigation
provid d by th ligibl collat ral as sp cifi d in th Bas l II guid lin s. In lin with Bas l II
guid lin s
th bank mak s adjustm nt in ligibl collat rals r c iv d for possibl futur
fluctuations in th valu of th collat ral. Th s adjustm nts ar also r f rr d to as
haircuts.

÷
??#??
?
&2#.'
Bank Alfalah l nds Rs 40 million to a particular count rparty
which is s cur d by collat ral
worth Rs 30 million. Rating of th count r part is B wh r as th collat ral consists of
s curiti s issu d by an A-rat d company. o
th risk w ight for th count rparty is º50%
and th risk w ight for th collat ral is 50%.

Und r th Compr h nsiv Approach: Assum that th adjustm nt to xposur to allow for
possibl futur incr as s in th xposur is º0% and th adjustm nt to th collat ral to
allow for possibl futur d cr as s in its valu is -º5%. Th n w xposur is:
º.º X 40 -0.5 X 30 = º.5 million
A risk w ight of º50% is appli d to this xposur 
Risk-adjust d ass ts = º.5 X º.5 = Rs. 2 . 5 M

 .!/c''#&#'

Th d cision on th typ and quantum of collat ral for ach transaction is tak n by th
Cr dit Approving Authority as p r th cr dit approving authorization approv d by th
Board of Dir ctors. Collat ral us d includ : gov rnm nt of Pakistan guarant s
gold
cash

shar s
gov rnm nt s curiti s
all that fall in ligibl collat ral.

Bank Alfalah limit d d t rmin s th appropriat collat ral for ach facility bas d on th
typ of product and count r party.

=? In cas of corporat and ME financing
fix d ass ts ar g n rally tak n as s curity
for long r t nor loans and curr nt ass ts for working capital financ .
=? uor proj ct financ
s curity of th ass ts of th borrow r and assignm nt of th
und rlying proj ct contracts is g n rally obtain d. Additional s curiti s such as
pl dg of shar s
cash collat ral tc may also b tak n. Bank Alfalah markup for
shar s is 35- 50% and for cash and all A cat gory s curiti s is º0%.
=? Mor ov r in ord r to cov r th ntir xposur P rsonal Guarant of Dir ctors is
also obtain d by th bank.
=? uor r tail products th s curity to b tak n is d fin d by th product policy for th
r sp ctiv products.
=? Housing loans and automobil loans ar s cur d by th s curity of th prop rty
b ing financ d. Th valuation of th prop rti s is carri d out by an approv d
valuation ag ncy. H r th Bank Alfalah markup for prop rty is 40%.

÷
????
?
Bank alfalah usually avoid litigation
th r for if th cli nt hasnǯt payback th cr dit th n
l v rag of 3-6months is giv n
and th y ch ck on it.

Proactiv cr dit risk manag m nt practic s in th form of studi s
r s arch work
int rnal
rating syst m
int grat d bank-wid risk manag m nt and int rnal control fram work

adh r nc to Bas l II accord
portfolio monitoring ar only som of th prud nt m asur s
th bank is ngag d in for mitigating risk xposur s.
? 

÷
????
?
 c

  
?

 ? ?
?
=? Askari Bank at pr s nt r quir s th ntiti s from small st (individual) to larg st
(MNC) to g t ratings from xt rnal rating ag nci s. How v r
it may b losing
custom rs for loans as th y may not afford th cost of valuation and docum ntation.
Askari bank do s off r s rvic s at charg
th r for burd n r mains on ntiti s.
Askari Bank should form polici s to giv r laxation to ntiti s for loan proc ss.
=? Th Bank should mak an organization wid n tworking with a c ntral databas

wh r information from all th d partm nts from bank is availabl and can b us d
for risk mitigation purpos s wh n v r n d d. It will sav tim .
=? Askari Bank can initiat th proc ss of impl m nting IRB
d spit th tim
cost and
fforts involv d. This would allow th Bank to k p asid capital as clos to th risk
it is taking with th xposur s.
=? Th bank should impl m nt VAR syst m for Cr dit Risk Mitigation as w ll
as it is
b ing us d for Mark t Risk manag m nt. Bas l II is shifting its focus from r gulatory
capital to conomic capital. Economic capital r quir s banks to s t asid capital
bas d on actual
xp ct d and un xp ct d loss s
bas d on historic data
th syst m
is abl to calculat th possibl risk associat d with sampl s t and it would h lp th
bank also pr par for un xp ct d loss.
=? Th Bank can formulat polici s to provid insuranc to th ntiti s that p rform
w ll on an av rag but may d fault for loan r paym nt du to unfor s n
involuntary factors
such as natural disast rs. This will incr as bankǯs custom r
bas .
? ?

÷
????
?
 ?   ?

=? Bank Alfalah should impl m nt IuLEX DzR v l us
risk manag m nt softwar of

Oracl financial  rvic s olution
having th ability to g n rat liv Capital
Ad quacy Ratio and its board should r vi w at l ast annually its ov rall cr dit risk
strat gy to k p it curr nt with th global financial tr nds.
=? Th cr dit strat gy of Alfalah should also tak into consid ration th countryǯs
conomy as w ll as th shifting in composition and quality of ov rall cr dit portfolio

b caus of th long t rm natur of this cr dit strat gy
p riodical am ndm nts
should b don
if n c ssary.
=? A sound risk manag m nt structur should b in plac such that th structur
should b in sync with th conc rn d bank Alfalahǯs ov rall siz
compl xity and
div rsifi d activiti s.
=? Alfalah Bank should not ov r r ly on collat rals but should consid r th m only as a
buff r that would provid prot ction incas of d fault. It should rath r focus on th
borrow rǯs d bt s rvicing ability and r putation in th mark t
=? Also Bank Alfalah should mak sur that th siz of its cr dit limit should d p nd on
th str ngth of th borrow r; g nuin r quir m nts of d bt
conomic conditions
and Alfalahǯs own risk tol ranc
cr dit limits should b r vi w d r gularly.

? 

÷
????
?
 c c 

Bas d on our proj ct w can say that th banking syst m and in turn financial syst m is
saf and sound du to th impl m ntation of Bas l Accord II in BP r gulation. Th banks
ar abl to pr v nt or limit risk to th ir capitals by s tting asid part of th ir total capital
risk for risk and also g t d posits without d positors f aring loss du to risk from banksǯ
activiti s. W can s many of its advantag s in form of:
=? R duction in th l v l of risk bank cr ditors ar xpos d to (i. . to prot ct
d positors)
=? R duction in yst mic risk r duction
that is r duction in possibiliti s that may
caus multipl or major bank failur s
=? Avoid misus of banks for ill gal and un thical purpos s
=? Cr dit allocation -- to dir ct cr dit to favor d s ctors
=? Incr as in th confid nc of inv stors
local and for ign rs du to ff ctiv risk
mitigation fram work in plac .
But still bank has to k p th ms lv s up-to-dat to th n w t chnologi s and softwar
which can mak th ir proc dur s and way of managing cr dit risk mor ff ctiv . Now
Bas l Committ has introduc d Bas l III
mor conc ntrating on liquidity risk. Th r for
banks hav to focus on that too as cr dit risk canǯt b analyz d in isolation.
?

? ?

÷
????
?
   
?

=? Bank alfalfa Annual R port 200

www.bankalfalah.com/about/download/AnnualR port200
.pdf

=? Risk manag m nt guid lin s by BP

www.sbp.org.pk/riskmgm.pdf

=? N d for r gulation of banking syst m

http:// n.wikip dia.org/wiki/Bas l_Accords
?
=? Bas l II
http:// n.wikip dia.org/wiki/Bas l_II

? ?

÷
????
?
?

 ?

÷
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?
?

*&-!%
#"#*"&#0&%

&+ http://www.askaribank.com.pk/R ports/Askari%20uinancials%20200
.pdf 

÷
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?
 ?

*&9c.""!/*'#& c#.#'/

&+ http://www.askaribank.com.pk/R ports/Askari%20uinancials%20200
.pdf 

÷
??

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?
 ?

*&7c#.#'6#+ #

&+ http://www.askaribank.com.pk/R ports/Askari%20uinancials%20200
.pdf 

÷
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?
 ?

*&Cc&!%2.!&

&+ http://www.askaribank.com.pk/R ports/Askari%20uinancials%20200
.pdf

*&D#"c'#!!/+#"" &,!""*

&+ http://www.sbp.org.pk/publications/prud ntial/PRs-Corporat .pdf?

÷
??
"??
?
 5   $?

º.? What ntails capital risk for th bank?

2.? What ar th capital manag m nt r quir m nts sp cifi d by BP?
3.? Which approach is th bank following to maintain its r gulatory capital? And why?
4.? What ar th xt rnal and int rnal factors that may giv ris to cr dit risk for th
Bank?
5.? What ar th risk mitigation t chniqu s to maintain r gulatory capital with r gard
to cr dit risk?
6.? What is th Bankǯs policy was g tting th ntity rating?
.? How do s th Bank monitor and formulat s action according to p rformanc of
loan?

÷
??"??
?