STATE BANK OF PAKISTAN ANNUAL PERFORMANCE REVIEW 2012-13 Our Vision Our Mission To transform SBP into a modern and dynamic To promote monetary and financial stability central bank, highly professional and efficient, fully and foster a sound and dynamic financial equipped to play a meaningful role, on sustainable system, so as to achieve sustained and basis, in the economic and social development of equitable economic growth and prosperity in Pakistan. Pakistan. The Team Dr. Muhammad Nadim Hanif [email protected] Mr. Imran Naveed Khan [email protected] Contents Governor’s Message 1 Governance Structure of the State Bank of Pakistan 7 Strategic Objectives of SBP 1 Maintaining Price Stability with Growth 17 1.1 Monetary Policy Formulation 17 1.2 Monetary Policy Department 17 1.3 Research Department 19 Economic Policy Review 1.4 21 Department 1.5 Statistics and Data Warehouse Department 22 2 Broadening Access to Financial Sector 25 2.1 Infrastructure, Housing & SME Finance Department 25 2.1.1 Small and Medium Enterprise Finance 25 2.1.2 Housing Finance Market 26 2.1.3 Infrastructure Finance Market 28 2.1.4 SBP Refinance Facilities 29 2.2 Agriculture Credit & Microfinance Department 30 2.2.1 Agricultural Finance 30 2.2.2 Microfinance 32 2.2.3 Donor Funded Programmes Based SBP Initiatives 34 3 Ensuring Soundness of Financial Sector 39 3.1 Banking Supervision Group 39 3.1.1 Banking Inspection (On-Site) Department 39 3.1.2 Off-Site Supervision & Enforcement Department 40 3.2 Banking Policy and Regulation Group 41 3.2.1 Banking Policy & Regulations Department (BPRD) 41 3.2.2 Islamic Banking Department 45 3.2.3 Consumer Protection Department 47 4 Monetary, Exchange Rate, and Reserve Management 49 4.1 Money and Debt Market 49 4.2 Foreign Exchange Reserves Management 53 4.3 Changes in Foreign Exchange Related Instructions 54 4.4 Exchange Companies (ECs) 54 4.5 Pakistan Remittance Initiative (PRI) 55 4.6 Treasury Operations 55 5 Payment and Settlement Systems 57 5.1 Overview 57 5.2 Large Value Payment System 57 5.3 Retail Payment Systems 58 Management Strategy of SBP 6 Human Resource Developments 63 6.1 Overview 63 6.2 HR Profile 63 6.2.1 Employee Turnover 63 6.2.2 Recruitment 64 6.2.3 Training and Development 64 6.2.4 Networking Efforts 65 7 Information Technology Developments 67 7.1 Overview 67 7.2 Business Systems Developments 67 7.3 Infrastructure Developments 68 7.4 Information Security and Assurance 68 SBP Subsidiaries 8 SBP Banking Services Corporation (SBP-BSC) 73 9 National Institute of Banking & Finance (NIBAF) 79 9.1 Overview 79 9.2 Training Delivery at NIBAF 80 9.2.1 State Bank of Pakistan 80 9.2.2 SBP-BSC (Bank) 81 9.2.3 Training Programme for Afghanistan International Bank 81 9.2.4 A Course for Senior Management of Pak China Investment Company 81 9.2.5 Written and Verbal Communication Skills Programmes with IBA, Karachi 81 9.2.6 Certification Courses 82 9.3 Others Training Programmes/Courses 82 9.3.1 Management and Leadership Programmes-New Initiatives 82 9.3.2 Bank of Azad Jammu and Kashmir (BAJK) MTOs Training Programme (Batch-1) 83 9.3.3 Training Programmes for Baluchistan and Punjab Provincial Governments 83 9.3.4 International Conference on the Power of Entrepreneurship 83 Annual Accounts of SBP and Subsidiaries 10 Annual Budget Review FY13 87 10.1 Overview 87 10.2 Corporate Expenses 87 10.3 Establishment Expenses 87 10.4 Operating Expenses 87 10.5 Provisions 88 11 Annual Financial Performance Review FY13 89 11.1 Overview 89 11.2 Income 89 11.2.1 Net Discount/Interest/Markup and/or Return Income 89 11.2.2 Commission Income 90 11.2.3 Exchange Gain – Net 90 11.2.4 Dividend Income 91 11.2.5 Other Operating Income/ Loss -Net 91 11.2.6 Other Income /Charges -Net 91 11.3 Expenditure 91 11.3.1 Bank Notes' Printing Charges 91 11.3.2 Agency Commission 91 11.3.3 General Administrative and Other Expenses 91 11.3.4 Provision / (Reversal of Provision) 92 11.4 Distributable Profit 92 12 Consolidated Financial Statements of SBP and its Subsidiaries 93 13 Unconsolidated Financial Statements of SBP 139 14 Financial Statements of SBP-BSC (Bank) 187 15 Financial Statements of NIBAF 211 Annexure A Chronology of Policy Announcements 3 A-1 Banking Policy & Regulation Group 3 A-2 Development Finance Group 4 A-3 Financial Market/Reserve Management Group 7 A-4 Operations Group 18 B B-1 Business Continuity Management 23 B-2 Risk Based Auditing 26 B-3 Legal Services Department 28 B-4 Library Services 29 B-5 External Relations Department 31 B-6 Museum & Art Gallery 33 C Organizational Chart 37 D Management Directory 39 Boxes Major Steps taken by the S&DWH Department for Improvements in Data Compilation and 1.1 23 Dissemination Procedures 2.1 Revised Prudential Regulations (PRs) for Small and Medium Enterprise (SME) 25 2.2 SBP’s Major Initiatives for Refinance Facilities 30 2.3 Initiatives for Promotion of Agricultural Credit during FY13 31 2.4 Initiatives and Developments for Promotion of Microfinance 33 3.1 Enactment of Federal Ombudsmen Institutional Reforms Act, 2013 48 5.1 SBP Payment Systems Strategy and Initiatives 59 8.1 Significant Accomplishments of FEOD during FY13 75 8.2 Major Achievements of FEAD during FY13 76 8.3 Major Achievements of DFSD during FY13 76 Governor’s Message State Bank of Pakistan is the apex financial institution of the country. It is responsible for regulating the monetary and credit system of Pakistan to foster its economic growth, by fuller utilisation of country’s productive resources, while securing monetary stability. During the fiscal year 2013, as in the previous years, the Bank continued to endeavour to achieve its goal of economic growth with low inflation environment despite internal and external shocks and amid difficult trade-offs. Though economic growth remained slightly below the target, SBP succeeded in bringing inflation down to single digit level in FY13. Noteworthy policy decisions and other developments during FY13 are summarized below: The monetary policy easing, which started in FY12, continued in FY13 as well. SBP reduced its policy rate by 300 basis points (bps) in FY13, with a cumulative reduction of 500 bps in the last two years, bringing the SBP reverse repo rate to 9.0 percent. The key drivers of these policy decisions were a sharper than anticipated decline in inflation and attempt to promote dwindling private investment in the country. With the objective to have a forward-looking view while deciding on monetary policy stance, consumer confidence and inflation expectations indices are built by the Bank. These micro level survey based indices are useful in explaining inflation dynamics in Pakistan. For the benefit of external stakeholders as well, SBP has published the survey results, the indices of the consumer confidence and inflation expectations, and the background research on its website. SBP provided banks more flexibility in their liquidity management by extending reserve maintenance period from one week to two weeks (for CRR) and reducing the daily minimum CRR from 4 percent to 3 percent. SBP also guided banks to improve their liquidity management practices by dissuading their frequent access to SBP overnight reverse repo or repo facilities by introducing a spread of plus/minus 50bps for an eligible institution visiting said window more than seven times in a given quarter. Dissemination of bank-wise data on excess cash reserves and banks’ use of SBP’s standing facilities has brought transparency and efficiency in our money market. With the introduction of an interest rate corridor of 300bps, in August 2009, volatility in the short-term interest rates reduced significantly that helped in strengthening the transmission mechanism of the monetary policy. In order to improve the transmission mechanism by further reducing the interest rate volatility in the short-term interest rates; SBP narrowed the interest rate corridor by 50 bps, effective February 11, 2013, to 250 bps. Most of the banks in Pakistan were used to pay profit to saving depositors on minimum monthly balances. To promote savings by rationalizing the deposit rates, and to reduce high banking spreads by bringing compatibility between the return on loans and the payment of profit on saving deposits; banks are now, effective from April 01, 2013, directed to pay profit 1 State Bank of Pakistan Annual Report FY13 to depositors on average monthly balances. Furthermore, instead of following a discretionary policy to fix the minimum deposit rate, SBP has recently made a rule for it by linking the same to the floor of the interest rate corridor. The minimum profit rate to be paid on all PKR saving deposits will now be 50 bps below the prevailing SBP repo rate. In order to improve transparency and bring standardization in Islamic banking institutions’ profit and loss distribution policies and practices, SBP issued instructions for ‘Profit & Loss Distribution and Pool Management for Islamic Banking Institutions’ on November 19, 2012. The instructions were well received by domestic and international stakeholders, which are likely to improve perception and understanding of the masses generally and Islamic banking clients particularly. The exchange rate policy in Pakistan continued during FY13 to aim at ensuring smooth functioning of the foreign exchange market and optimizing foreign currency reserves of the country. Considering the increasing volume of transactions and enabling banks to manage large flows without adding excessive volatility in the market, SBP raised the cap on aggregate foreign exchange exposure limit (FEEL) of individual authorized dealers (ADs) from PKR 2.5 billion to PKR 3.5 billion and increased the overall FEEL of the market by 9.7 percent.