Quality of Internal Risk Rating Frameworks at Commercial Banks in Pakistan

The importance of internal risk rating system for an effective credit risk management system can not be overemphasized. The system demands contunuous support and involement of top management of the commercial banks, and the regulators. The attempt to develop robust internal risk rating systems is ongoing among commercial banks. This study was made to measure the quality of internal credit risk rating systems of commercial banks in Pakistan in terms of the various aspects of an internal rating system. To achieve this objective interviews of head of risk management of 10 commercial banks operating in Pakistan were conducted. The unstructured questions used in the interviews were transcribed and the technique of content analysis was used. The findings revealed that internal risk rating systems of commercial banks in Pakistan are generally strong but need improvement in a few aspects. The following areas of internal risk rating systems of commercial banks in Pakistan were found weak: 1. Environment specific to internal risk rating methodologies employed by the banks. 2. Environment specific to the documentation in the internal risk rating system. Other areas such as credit grades, use of qualitative and quantitative factors, methodology, internal risk rating policy, external credit rating, rating definitions, rating criteria, boards involvement were found in lines with the internal risk rating guidelines issued by the SBP. Key Words: Credit Risk, Credit Risk Management, Internal Risk Rating