Basel Capital Adequacy Framework: Instructions for Credit Risk

Preamble

1. Basel III framework is a central element of Basel Committee on Banking Supervision (BCBS)’ reforms in response to the Global Financial Crisis (GFC). The Basel III framework is a core element of the reforms by the Basel Committee on Banking Supervision (BCBS) in response to the Global Financial Crisis (GFC).
2. The first phase of Basel III reforms, which have largely been adopted by State Bank of Pakistan (SBP) are as under: The first phase of the Basel III reforms, largely adopted by the State Bank of Pakistan (SBP), is as follows: a. Improvement in the quality, quantity and level of bank’s regulatory capital; Improvement in the quality, quantity, and level of banks' regulatory capital; b. Introduction of Capital Conservation Buffer (CCB); Introduction of the Capital Conservation Buffer (CCB); c. Introduction of a minimum Leverage Ratio requirement of 3% to constrain excess leverage in the banking system that also complements the risk-weighted capital requirements; Introduction of a minimum Leverage Ratio requirement of 3% to limit excess leverage in the banking system, which also complements risk-weighted capital requirements; d. Adoption of liquidity management framework for mitigating excessive liquidity risk and maturity transformation, through the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and Liquidity Monitoring Tools; Adoption of a liquidity management framework to mitigate excessive liquidity risk and maturity transformation through the Liquidity Coverage Ratio (LCR), the Net Stable Funding Ratio (NSFR), and Liquidity Monitoring Tools; e. Framework for Domestic Systemically Important Banks (D-SIBs). A framework for Domestic Systemically Important Banks (D-SIBs).
3. The second phase of Basel III reforms primarily includes BCBS’ risk weighting regime (denominator of CAR) and a few other improvements. The second phase of the Basel III reforms primarily includes the BCBS risk-weighting regime (the denominator of the CAR) and several other improvements. Therefore, with an objective to initiate implementation of the relevant second phase reforms, in an orderly and timely fashion, SBP, in line with BCBS instructions, has prepared revised instructions on the Standardized Approach for Credit Risk. Therefore, with the objective of initiating the implementation of the relevant second-phase reforms in an orderly and timely manner, the SBP, in accordance with BCBS instructions, has prepared revised instructions for the Standardized Approach for Credit Risk.
4. The instructions contained in this document will bring partial change in the denominator (Risk Weighted Assets - RWAs/ Exposure) of Capital Adequacy Ratio (CAR). The instructions contained in this document will result in partial changes to the denominator (Risk-Weighted Assets - RWAs/Exposure) of the Capital Adequacy Ratio (CAR). Notably, these instructions cover revised rules for the calculation of only credit risk related RWAs. Notably, these instructions cover revised rules for the calculation of only credit risk-related RWAs. Therefore, for determining market risk and operational risk related RWAs, during the CAR calculation, existing instructions on the subject will be used. Therefore, for determining market risk and operational risk-related RWAs during the CAR calculation, existing instructions on the subject will be used.
5. The aforementioned reforms shall apply to all Banks, Digital Banks, and Development Finance Institutions (DFIs), hereinafter collectively referred to as 'bank(s)’. These reforms shall apply to all Banks, Digital Banks, and Development Finance Institutions (DFIs), hereinafter collectively referred to as 'banks'. Reforms will be implemented on parallel run basis for a period of four quarters starting from September 30, 2025 till June 30, 2026. Reforms will be implemented on a parallel-run basis for a period of four quarters, starting from September 30, 2025, through June 30, 2026. The parallel run adoption approach would help SBP to monitor practical challenges and issues faced by the banking industry during implementation of revised instructions and enable SBP to use industry feedback for review/ revision of these instructions (if warranted). The parallel-run adoption approach will help the SBP monitor practical challenges and issues faced by the banking industry during the implementation of the revised instructions and enable the SBP to use industry feedback to review or revise these instructions if warranted. At the end of parallel run phase, SBP may issue final instructions on the subject after taking into account the relevant industry feedback and this final version would replace SBP’s existing instructions in the relevant areas for industry wide implementation. At the end of the parallel-run phase, the SBP may issue final instructions on the subject after taking into account the relevant industry feedback, and this final version will replace the SBP's existing instructions in the relevant areas for industry-wide implementation.
6. Understandably, implementation of these instructions, on parallel run basis, would necessitate additional regulatory reporting by the banks to SBP. Understandably, the implementation of these instructions on a parallel-run basis will necessitate additional regulatory reporting by banks to the SBP. However, to ease off the burden of additional regulatory reporting, industry is given extra reporting time of 10 working days to submit quarterly CAR statements. However, to ease the burden of additional regulatory reporting, the industry is granted an extra 10 working days to submit quarterly CAR statements. Additionally, for the annual audited CAR return, duly certified by the external auditor, an extra month is being allowed, extending the submission deadline to within four months of the close of the financial year. Additionally, for the annual audited CAR return, duly certified by an external auditor, an extra month is allowed, extending the submission deadline to within four months of the close of the financial year.
7. The scope of application of revised instructions would remain both at standalone as well as at consolidated level. The scope of application of the revised instructions will remain at both the standalone and consolidated levels. Moreover, regulatory reporting based on these instructions shall only be submitted in soft copy format (excel sheet) to SBP. Moreover, regulatory reporting based on these instructions shall be submitted only in soft copy (Excel sheet) format to the SBP. Accordingly, for periodical reporting of capital adequacy/ leverage ratio under these instructions, during the parallel-run, banks shall submit their returns via email to car.bprd@sbp.org.pk. Accordingly, for periodic reporting of the capital adequacy/leverage ratio under these instructions during the parallel run, banks shall submit their returns via email to car.bprd@sbp.org.pk. After the parallel run period, banks shall submit the quarterly returns on DAP portal within 14 working days of the quarter end, whereas annual audited returns, duly certified by the external auditor, shall be submitted within three months of the close of the year. After the parallel-run period, banks shall submit quarterly returns on the DAP portal within 14 working days of the quarter end, while annual audited returns, duly certified by an external auditor, shall be submitted within three months of the close of the year.

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