Boas Irima, Unit Manager, Banks

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Bank of Papua New Guinea (BPNG) Non-bank
Supervision Practices and Regulation

• presented by
• Boas Irima, Unit Manager, Banks Finance
  Companies Unit
• Banking Supervision Department, BPNG
• for
• Pacific Financial Inclusion Working Group Meeting
• 26 January 2012

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Presentation Outline

• Overview of PNG Financial System
• BPNG Organisation Structure
• Supervisory Approach
• The Way Ahead

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Overview of PNG Financial System

• Central Banking Act 1973, as amended in 2000,
  gives BPNG power to formulate and implement
  monetary policy, regulate and supervise the
  financial system and ensure an efficient national
  and international payments system.
• BPNG supervises all depository corporations
  commercial banks, financial companies,
  microfinance institutions, savings and loans
  societies, and financial corporations (i.e.
  superannuation funds and life insurance companies
  and brokers).

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Overview of PNG Financial System (cont)

• Acts relating to the regulation and supervision
  of the financial system administered by BPNG

ACT APPLICATION
Banks and Financial Institution Act 2000 Banks, Finance Companies, Microfinance
Superannuation (General Provision) (Amendment) Act 2007 Superannuation Funds, Investment Managers, Fund Administrators
Life Insurance (Amendment) Act 2004 Life Insurance Companies and Brokers
Savings and Loans Societies Act 1995 Savings and Loans Societies (Credit Unions)
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Size of PNG Financial System
Industry Type (PGK USD0.47) Number of Institutions Total Assets (KMillion) Asset Composition ()
Commercial Banks 4 20,798.2 71.6
Finance Companies 7 917.7 3.1
Microfinance Institutions (MFI) 3 140.0 0.5
Savings and Loan Societies 22 801.9 2.8
Authorized Super Funds 6 6,036.0 20.8
Life Insurance Companies 4 364.0 1.3
Investment Managers 2
Fund Administrators 4
Life Insurance Brokers 4
Money Changers 5
Total 61 29,057.8 100.0
Source Quarterly Call Returns, 30 September 2011.
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Microfinance Institutions KPIs ()
Microfinance Institutions Microfinance Institutions Microfinance Institutions Microfinance Institutions Microfinance Institutions System Aggregate (30/09/11)
30/09/10 31/12/10 31/03/11 30/06/11 30/09/11 System Aggregate (30/09/11)
Capital Ratios
Total Capital to Risk Weighted Assets 25.0 17.4 15.9 9.2 9.4 29.7
Tier 1 to Risk Weighted Assets 29.6 26.5 15.3 9.2 8.8 20.2
Tier 1 to Total Assets (Leverage) 12.0 11.1 6.7 3.6 3.3 9.8
Asset Quality Ratios
NPLs to Total Assets 3.4 2.7 3.0 2.9 2.5 1.0
NPLs to Total Loans 15.4 11.4 11.9 10.9 8.9 2.3
Over due Loans to Total Loans 19.6 15.1 18.8 14.6 12.1 3.8
Provisions to Total Loans 4.4 6.3 4.6 4.8 4.7 2.9
Provisions to NPLs 28.8 55.8 38.9 43.8 53.0 96.3
Earnings Ratios
Return on Assets - - - - 0.1 2.5
Return on Equity -2.8 -4.0 -0.4 -5.5 3.1 28.3
Liquidity Ratios
Liquid Assets to Deposit STL 78.9 72.9 71.0 71.7 69.9 70.4
Total Deposit to Total Assets 87.3 89.4 89.9 92.2 93.4 77.2
Total Loans to Total Deposits 25.2 26.6 27.9 28.9 29.4 49.2
Source Quarterly Call Returns.
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BPNG Organizational Structure
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Financial System Supervision Structure
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Supervisory Approach

• Following financial sector reform in 2000, BPNG
  introduced
• Stringent supervision of financial institutions
  by enforcing the Acts
• Issuance of a number of prudential standards,
  directives and regulations under the Acts
• Enhance supervisory techniques of supervised
  institutions

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Supervisory Approach (cont)

• Two Supervisory Methods
• On-site Inspections
• Assessment of risk during visits to supervised
  institutions, covering liquidity, operational,
  credit and market risks. Include review of risk
  governance, board, management, strategy/planning
  and capital
• Determination of appropriate supervisory response
• Issue Report of Examination (ROE)

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Supervisory Approach (cont)

• Off-site Monitoring
• Assessment of risk through information received
  from supervised institutions such as financial
  returns, correspondences and discussions at
  prudential meetings. Include review of supervised
  institutions responses to matters requiring
  attention from on-site inspections
• Determination of appropriate supervisory response
• Follow through on matters requiring attention
  until these are closed off
• In addition BPNG also does
• Licensing and Policy Work
• Enforcement and Compliance

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Supervisory Approach (cont)
Risk Based Supervisory Cycle
Supervisory Process
Documents
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Supervisory Approach (cont)

• CAMELS rating system used to rate financial
  institutions, an acronym for
• C Capital Adequacy
• A Asset Quality
• M Management
• E Earnings
• L Liquidity
• S Sensitivity to Market Risk
• A rating between 1-5 is used on each acronym as
  well as overall with number 1Very Good to 5
  Poor.

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Supervisory Approach (cont)

• Ratings assigned, used for
• Off-site monitoring of trends and severity of
  problems
• Prioritising on-site inspections
• Eg. On-site reviews are done every two years for
  well managed institutions (CAMELS 1-2 rated
  institutions). For institutions rated 3-5,
  reviews are done more frequently
• Determining the appropriate supervisory responses
  and enforcement actions

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The Way Ahead

• Explore separate regulatory framework for MFIs
• Microfinance unit to eventually take on MFI
  supervision
• Review of the Savings and Loans Societies Act

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Questions???