- weighted assets. under prs, mfbs are required to set 10 % of deposit liabilities in liquid assets and transfer 20 % of its annual profits after tax into reserve fund until it reaches equivalent to its capital base after which this allocation is reduced to 5 %. mfbs have to set up depositors ’ protection fund or scheme for the purpose of mitigating risk of its depositors, to which mfb / mfi shall credit not less than 5 % of its annual profit after taxes. mfbs have to set aside general provision of 2 % besides other stringent provision requirements. mfbs need to lend maximum loan size of rs150, 000. sbp has further issued ngos / rural support programs / cooperative transformation guidelines for their upgradation to mfbs. fit and proper criteria have been laid down for ceos and management of mfbs. guidelines have been issued for commercial banks interested in engaging in microfinance business. sbp unique and rich regulatory framework offering a model of development of mf. under sbp regulatory framework, banks can offer new financing schemes and innovative products to meet the financial requirements of smes, while providing themselves a viable and growing lending outlet. under prs, banks are encouraged to extend cash flow based lending and they can take clean exposure secured only against personal guarantees of smes owners for up to rs 3 million, however, clean funded exposure should not exceed rs 2 million. for eligibility smes ought to declare that it has not availed clean facilities from any other bank / dfi. the maximum exposure of a bank / dfi on a single sme shall not exceed rs 75 million. the total facilities ( including leased assets ) availed by a single sme from the financial institutions should not exceed rs 150 million provided that the facilities excluding leased assets shall not exceed rs 100 million. operational instructions. supplementing its prs, sbp has issued guidelines on risk management, business continuity plan, internal controls, and stress testing. both prs and guidelines form the basis of our regulatory framework that enables sbp to carry out a proactive role. as the business is expanding and banks are positioning themselves to take advantage of emerging opportunities, the technology adoption becomes imperative to get a competitive edge to deliver services in an efficient and cost effective manner. accordingly, almost all the banks in pakistan have embarked upon major it projects that will improve their operational efficiency and strengthen internal controls. anti - money laundering and combating financing

’ s elaborate risk management framework has helped contain effectively all sources and types of risks. to monitor resilience of banking system towards shocks to risk factors, sbp calibrates alternate scenarios subject the overall banking system and individual banks to different degrees of credit, market and liquidity shocks. this stress testing is conducted every quarter. based on september 2006 data, all banks were generally found to be resilient to credit risks and after shock capital adequacy ratio was found to remain above 11 %. for one bank, capital adequacy would decline below these levels if either benefit of forced sale value is withdrawn due to banks exposure to mortgage collateral and for couple of banks shocks to credit quality of consumer portfolio may increase consumer sector npls and impact capital adequacy. banks were equally resilient to interest rate shocks for movement upto 200bp and equity price movements in the range of 20 %. liquidity coverage ratio would come down in case of 10 % decline in liabilities. in case of exchange rate depreciation banks are found to actually gain as their foreign currency assets are in excess of foreign currency liabilities. while stress testing results offer broader comfort about banking sector strengths, there is need to recognize that there remain some areas of concerns. for example, banks do face ( i ) maturity mismatches, of special concern in the rising interest rate scenario ; ( ii ) potential risk of loan defaults in the backdrop of rising consumer finance portfolios and equity markets exposure of the banking system ; and ( iii ) risks posed by weaknesses in internal control system and lack of effective mechanism for containing operational risks. commercial banks are launching substantive efforts to address these problems and adoption of technological solutions and connectivity of all branches with headquarters of banks will help in this area. implementation of basel ii accord. pakistan adopted a road map for implementation of basel ii accord. under this, banks will be adopting the standardized approach from january 2008 based on the spade work conducted since july 2006. there are number of issues in adoption of standardized approach. first, only a small proportion of corporate sector is rated by the rating agencies. in absence of the rating of borrowers, banks may end up allocating more capital than warranted. to ensure coordinated approach to basel ii implementation, sbp has set up a working group under the guidance of sbp to remove obstacles in its smooth implementation. effective preparation for basel ii requires development of allied and support infrastructure that facilitates need for strengthening and enhancing role of