## Section I. Detailed Technical Assessment and Recommendations

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### Action plan, mission activities, and completed priorities
- Mission: in-person TA conducted during November 14-18, 2022 in Port Moresby; objectives included: review source data, institutional coverage, accounting and regulatory frameworks for DTs, LICs, PFs; compile FSIs using 2019 FSIs Guide report forms; agree work plan to report FSIs in new forms to STA.
- Key completed priority actions (Target Date: March 2023, Completed; Responsible: BPNG):
  - Report to STA for review the FSI sectoral financial statements (FSI-SRs) for DTs, including balance sheets, income statements, and memorandum series from 2008/Q4 onwards, the new FSI institutional coverage template (FSIC), and the new FSI metadata template (FSM).
  - Start regular reporting to STA FSI-SRs (on a quarterly basis), FSIC (annually) and FSM through the Integrated Collection System (ICS) for disseminating on the IMF’s FSIs website with data starting from 2008/Q4 onwards.
- Selected priority actions and milestones (with target dates and priority levels):
  - Start using the revised bridge tables developed by the mission to compile the FSIs for DTs consistent with the 2019 FSIs Guide. Target Completion Date: December 2022 (H) (Completed).
  - Lower the threshold to calculate the value of large exposures from 10 percent of capital and reserves to Tier 1 capital for the purposes of reporting the FSIs. Target Completion Date: October 2023 (M).
  - Compile new FSIs for OFCs (including LICs and PFs), credit to private sector, and interest rate spread on lending and deposit rates for dissemination. Target Completion Date: October 2023 (M).
  - Realign the classification of financial instruments and counterpart sectors in the consolidated balance sheet used to compile the FSIs with the framework already put in place by previous MFS TA missions, which is consistent with the 2019 FSIs Guide and the 2008 System of National Accounts (SNA). Target Completion Date: December 2023 (H).
  - Resume the publication of sectoral distribution of loans and customer deposits in the sectoral balance sheet for compilation of the FSIs. Target Completion Date: December 2023 (H).
  - Collect data on interest rate receivable/ payable by financial instrument and counterpart sector for reporting in FSIs data. Target Completion Date: December 2023 (H).
  - Formalize the memorandum of understanding with the OIC for collection of data and compilation of the FSIs for NLICs. Target Completion Date: December 2023 (H).
  - Review the treatment of contribution and payment of benefits in the preparation of income and expense statement of PFs. Target Completion Date: October 2023 (H).
- Methodological actions:
  - Use revised bridge tables mapping income/expense statements, balance sheets, and memorandum/supervisory series to IMF FSI reporting templates to ensure consistency with 2019 FSIs Guide.
  - Temporarily put on hold reporting of sectoral breakdowns of loans’ assets and deposits’ liabilities in the FSIs until shortfalls (granular accrued interest, short-term liabilities definition, and counterpart classification) are addressed.

### Background, scope, and reporting status
- First FSIs TA mission for the BPNG; BPNG had been compiling and reporting a set of FSIs to STA prior to the mission.
- Mission outputs:
  - Reviewed source data, institutional coverage, and accounting and regulatory frameworks for DTs, LICs, PFs.
  - Compiled FSIs for DTs, LICs, PFs using the IMF’s 2019 FSIs Compilation Guide and new FSI report forms.
  - Updated/developed bridge tables for DTs, LICs, PFs to map source data to IMF FSI templates.
  - Assisted BPNG to fill FSI institutional coverage (FSIC) and metadata (FSM) report forms.
- Reporting and dissemination:
  - BPNG started reporting FSIs data and metadata for DTs in the new FSI-SRs, FSM, FSIC templates to STA; published on IMF’s FSIs website in March 2023.
  - Newly compiled FSIs for ICs and PFs can be reported by October 2023 for dissemination.
- FSIs coverage guidance:
  - 2019 FSIs Guide recommends compiling and disseminating 17 core and 12 additional FSIs for DTs, and 23 additional FSIs for other sectors.
  - IMF’s FSI data portal disseminates FSIs data and metadata of 146 countries.

### Financial system structure, roles, and relative size
- BPNG roles:
  - Performs traditional central banking functions and acts as supervisory authority for commercial banks, credit institutions, development bank, LICs and PFs.
  - Responsibility to compile FSIs reassigned to newly created Financial Systems Development Department (FSDD).
- Relative size:
  - DTs account for approximately 75 percent of the total financial system assets.
  - OFCs sector holds approximately 25 percent of total assets of the financial system.
- Institutional composition highlights:
  - Banking sector: two domestically controlled banks and two foreign controlled subsidiaries; two domestically controlled banks occupy around 80 percent of banking sector total assets; one domestically controlled bank is a domestic systemically important bank with about 70 percent of total assets of the commercial banks.
  - Other DTs: nine licensed financial institutions, sixteen savings/credit cooperatives, and four microfinance institutions; these institutions account for less than 9 percent of the DTs financial assets. Savings/credit cooperatives (licensed under the Savings and Loan Societies Act, 1915) are currently not included in the compilation of FSIs.
  - OFCs: four superannuation funds are the largest subcomponent of OFCs, accounting for 22 percent of total financial assets.
  - Insurance subsector: five life and thirteen non-life ICs; LICs supervised by BPNG under Life Insurance Act 2000; NLICs supervised by OIC—data for eight out of thirteen NLICs are currently unavailable to BPNG due to no formal data-sharing arrangement with OIC.
  - State-owned bank: does not take deposits and holds 1.0 percent share of total financial system assets.
  - Remaining OFCs: 24 small financial corporations account for less than 0.5 percent of total financial assets.

### Key financial sector statistics (as reported)
- Aggregate table highlights (all figures preserved as in source):
  - Deposit Takers: Number of Institutions 33; Total Assets (Million, Kina) 54,911; Share in Total Assets (in percent) 75.2
  - Commercial banks: Number of Institutions 4; Total Assets (Million, Kina) 50,100; Share in Total Assets (in percent) 68.6
    - o/w domestically controlled: Number of Institutions 2; Total Assets (Million, Kina) 39,893; Share in Total Assets (in percent) 54.6
    - o/w foreign controlled subsidiary: Number of Institutions 2; Total Assets (Million, Kina) 10,207; Share in Total Assets (in percent) 14.0
  - Licensed financial institutions: Number of Institutions 9; Total Assets (Million, Kina) 2,280; Share in Total Assets (in percent) 3.1
    - o/w FX Dealers: Number of Institutions 2; Total Assets (Million, Kina) 1,020; Share in Total Assets (in percent) 1.4
  - Savings/credit cooperatives: Number of Institutions 16; Total Assets (Million, Kina) 1,608; Share in Total Assets (in percent) 2.2
  - Microfinance institutions: Number of Institutions 4; Total Assets (Million, Kina) 922.5; Share in Total Assets (in percent) 1.3
  - Other Financial Corporations: Number of Institutions 39; Total Assets (Million, Kina) 18,092; Share in Total Assets (in percent) 24.8
    - Pension funds: Number of Institutions 4; Total Assets (Million, Kina) 16,022; Share in Total Assets (in percent) 21.9
    - Insurance o/w life insurance: Number of Institutions 5; Total Assets (Million, Kina) 232.7; Share in Total Assets (in percent) 0.3
    - Insurance o/w nonlife insurance: Number of Institutions 13; Total Assets (Million, Kina) 848.4; Share in Total Assets (in percent) 1.2
    - State-owned bank: Number of Institutions 1; Total Assets (Million, Kina) 721.4; Share in Total Assets (in percent) 1.0
    - Fund Administers: Number of Institutions 3; Total Assets (Million, Kina) 40.4; Share in Total Assets (in percent) 0.1
    - Investment Managers: Number of Institutions 4; Total Assets (Million, Kina) 63.8; Share in Total Assets (in percent) 0.1
    - Life Insurance Brokers: Number of Institutions 6; Total Assets (Million, Kina) 156.4; Share in Total Assets (in percent) 0.2
    - Money Changers: Number of Institutions 8; Total Assets (Million, Kina) 6.5; Share in Total Assets (in percent) 0.01
    - Money Remitters: Number of Institutions 2; Total Assets (Million, Kina) Not available; Share in Total Assets (in percent) -
    - Mobile Network Operators: Number of Institutions 1; Total Assets (Million, Kina) Not available; Share in Total Assets (in percent) -
  - Total: Number of Institutions 72; Total Assets (Million, Kina) 73,002; Share in Total Assets (in percent) 100
- Notes:
  - Data for commercial banks are as of December 2021 and for the other institutions are as of December 2020. For NLICs, the data are aggregate over five out of thirteen corporations which are currently available to the BPNG.

### Institutional coverage, consolidation bases, and gaps
- Consolidation approaches used:
  - Cross-border, cross-sector, domestically incorporated (CBCSDI) consolidation for DTs.
  - Aggregate resident-based approach (ARBA) for LICs and PFs.
- Coverage:
  - DTs: four commercial banks (and their deposit-taking and non-deposit-taking subsidiaries), four deposit-taking microfinance institutions, and nine licensed financial institutions.
  - LICs: coverage comprises four LICs.
  - PFs: coverage comprises four superannuation funds.
- Gaps and extensions:
  - Eight NLICs' data are not available to BPNG due to no formal arrangement with OIC; coverage for ICs could be extended once data are shared.
- Source data adequacy:
  - Source data for compiling FSIs for DTs, ICs, and PFs are adequate and generally meet criteria established by the 2019 FSIs Guide.

### Accounting, regulatory frameworks, and methodological shortfalls
- Accounting and regulatory frameworks:
  - Broadly consistent with Basel I and International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS).
  - Minimum required capital adequacy ratio is currently at 12 percent for all commercial banks.
  - Components of regulatory capital and risk weighted assets are broadly consistent with Basel I framework; deviations should be documented in metadata.
  - Banks adopted IFRS9 for valuation of financial instruments since 2020 and relied on a mixture of supervisory method and IFRS9’s expected credit losses to calculate the minimum provisioning requirements.
- Identified methodological shortfalls and recommended data improvements:
  - Need to collect granular data on accrued interest receivable/payable by financial instrument and counterpart sector.
  - Change the definition of short-term liabilities to not less than three months.
  - Realign classification of counterpart sectors in the consolidated financial statements used to compile FSIs in line with monetary and financial statistics (MFS) to ensure greater consistency with data reported to the IMF.
  - Until shortfalls are addressed, reporting of sectoral breakdowns of loans’ assets and deposits’ liabilities in the FSIs was temporarily put on hold.
- Metadata and institutional coverage:
  - Mission updated the metadata and institutional coverage report forms (FSM and FSIC); contents of new Tables 2 and 3 of the metadata were broadly discussed and agreed with BPNG staff and are consistent with the 2019 FSIs Guide.

### Asset quality, NPLs, and provisioning framework
- Definitions and classification:
  - NPLs are defined as loans that are past due for 90 days or more.
  - NPLs and minimum provisions requirements are defined in BPNG’s prudential standard 2/2003 on asset classification, provisioning, and suspension of interest.
  - Loans are considered NPLs when any portion of principal or interest which is due and unpaid for 90 days or more, or interest payments for 90 days or more have been capitalized, refinanced, or rolled over into a new loan.
  - National NPL definition is broadly consistent with the 2019 FSIs Guide but does not cover cases where there is evidence to reclassify NPLs before they are past due for 90 days (e.g., debtor files for bankruptcy).
- Classification mapping:
  - NPLs comprise past due loans that are classified as substandard, doubtful and loss.
  - Performing loans comprise loans that are classified as pass or acceptable and special mention.
  - Provisions on performing and NPLs are classified as general and specific provisions, respectively.
  - Level of general and specific provisions is determined according to number of days past due (Table 3).
  - When loans are classified as NPLs, they are placed on non-accrual status.
- Table 3: Loans Classification and Minimum Provisioning Requirements
  - Pass or Acceptable: Number of days past due 0-59; Minimum provisions (in percent) 1
  - Special mention: Number of days past due 60-89; Minimum provisions (in percent) 5
  - Substandard: Number of days past due 90-179; Minimum provisions (in percent) 25
  - Doubtful: Number of days past due 180-359; Minimum provisions (in percent) 50
  - Loss: Number of days past due more than 360; Minimum provisions (in percent) 100

### Capital adequacy, risk-weighting, and regulatory ratios
- Capital framework:
  - Capital adequacy ratios of banks follow mainly Basel I Capital Accord.
  - Papua New Guinea banks have adopted a simplified definition of Basel’s leverage ratio: ratio of Tier 1 capital to total assets (after adjusting for deduction specific to Tier 1 capital).
  - Components of regulatory capital and RWAs are prescribed by BPNG’s prudential standard 1/2003 on capital adequacy.
- Capital components (preserved terminology):
  - Tier 1 capital comprises permanent shareholders’ equity (issued and fully paid-up ordinary shares and non-cumulative perpetual preference shares) plus disclosed reserves (additional paid-in share premium plus retained earnings or undistributed profits) and minority interests in the equity of consolidated subsidiaries, less: goodwill and other eligible supervisory deductions.
  - Tier 2 capital consists of current year’s interim profits (or losses), undisclosed reserves, asset revaluation reserves (if allowed by the Bank and consistent with applicable accounting standards), general loan loss provisions (not exceeding 1.25 per cent of total risk-weighted assets), qualifying subordinated term debt, and hybrid debt-equity capital instruments. Tier 2 capital is limited to a maximum of 100% of Tier 1 capital.
  - Total regulatory capital is the sum of the Tier 1 and 2 capitals (net of deductions).
  - Total RWAs are calculated following the Basel I’s standardized approach for credit risk. Off-balance sheet credit exposures are converted into their credit equivalent amounts by multiplying nominal amounts with their respective credit conversion factor, ranging from 0–100 percent depending on type of transaction and maturity, before risk weights are applied.
  - A zero percent conversion factor is applied to commitments with an original maturity of up to one year, or which can be unconditionally canceled at any time.
- Regulatory minima:
  - Minimum required capital adequacy ratio: 12.0 percent.
  - Minimum Tier 1 capital ratio: 8.0 percent.
  - Minimum leverage capital ratio: 6.0 percent.
  - A higher minimum may be prescribed for banks with significant growth or inadequate risk management.

- Table 4: selected risk-weight categories (preserved text entries)
  - Risk weight 0 percent: Cash; Claims on and balances with the BPNG; Claims, or portions thereof, on, guaranteed by, or fully secured by securities issued by the Government of Papua New Guinea; Claims on central governments and central banks denominated in national currency and funded in that currency; Other claims on OECD central governments and central banks; Claims, or portions thereof, collateralized by securities of, or guaranteed by, OECD central governments; and Claims, or portions thereof, fully secured by cash or pledged deposits in the same bank.
  - Risk weight 20 percent: Claims on multilateral development banks ... Cash items in process of collection.
  - Risk weight 50 percent: Loans fully secured by mortgages on residential property ... Claims on public enterprises as approved by the BPNG.
  - Risk weight 100 percent: Claims on the private sector; Claims on, or loans guaranteed by, domestic commercial banks and other banks incorporated outside the OECD with a residual maturity of over one year; Claims on central governments outside the OECD ... and All other assets, excluding those deducted from capital.

### Source data, reporting forms, and data gaps
- Source data adequacy:
  - Source data from DTs, LICs and PFs are broadly adequate to compile the FSIs for Papua New Guinea. Source data cover income and expense statements, balance sheets and memorandum series collected quarterly as described in respective charts of accounts, plus supervisory series for DTs (capital adequacy, asset quality, earnings and profitability, liquidity, net open positions in FX).
- Prudential reports used to calculate FSIs (preserved list of report forms):
  - DTs: Call Returns 1.1. Balance Sheet
  - DTs: Call Returns 1.2. Balance Sheet - Supporting Details
  - DTs: Call Returns 2.1. Income Statement
  - DTs: Call Returns 3.1. Loan Book Reconciliation
  - DTs: Call Returns 3.2. Largest Loan Relationships
  - DTs: Call Returns 4.1. Delinquent Loans
  - DTs: Call Returns 4.3. Deposit Composition
  - DTs: Call Returns 5.1. Capital Adequacy - Risk Weight Assets
  - DTs: Call Returns 5.2. Capital Adequacy - Capital Components
  - DTs: Call Returns 8.1. Market Sensitivity
  - LICs: Life Insurance Companies Returns Form 1. Statement of Revenue and Distribution
  - LICs: Life Insurance Companies Returns Form 2. Balance Sheet
  - LICs: Life Insurance Companies Returns Form 3. Statement of Premium and Commission
  - LICs: Life Insurance Companies Returns Form 6. Statement of General Expenses
  - PFs: Form ASF-1. Statement of Change in Net Assets
  - PFs: Form ASF-2. Statement of Net Assets
- NLICs data gap:
  - Only balance sheet data from five out of thirteen NLICs are currently available to BPNG; full FSIs for the insurance sector require OIC data sharing.

### Compilation framework, bridge tables, and expanded FSIs
- Mission updated and provided bridge tables to map source data to FSI-SRs (tables 5.1 DT, 5.3.1 LICs, 5.4 PFs) and derive FSIs from underlying FSD sheet data.
- New FSIs compiled and to be reported quarterly:
  - Two new core and one additional FSI for DTs.
  - Two additional FSIs on the size of OFC’s subsector.
  - Two additional FSIs for LICs.
  - Two additional FSIs for PFs.
- Differences between BPNG’s existing FSIs and mission-developed FSIs are documented (see Appendix C); mission recommendation to start using revised bridge tables by December 2022 was completed.

### Deposit Takers: reclassifications, sectoral statements, and data issues
- Reclassifications in Table 5.1 DTs:
  - Income and Expense Statement:
    1. Other (Advisory Fees, etc.) reclassified to other income from fees and commissions receivable
    2. Extraordinary profit/losses reclassified to other income/expenses from extraordinary profits/losses
  - Balance Sheet:
    3. Other assets reclassified to other financial assets from nonfinancial assets
    4. Suspended interest deducted from gross loans (and not as specific provisions)
    5. General loan loss provisions reclassified to general and other provisions from capital and reserves
- Reporting limitations and recommended data collection:
  - Lack of granular data on accrued interest receivable/payable by financial instruments and counterpart sectors led to proportional allocation of interest receivable/payable; mission recommends collecting granular breakdowns.
  - Current counterpart sector classification in consolidated financial statements is not fully consistent with the 2019 FSIs Guide; mission advised pausing publication of sectoral distribution of loans and deposits until sectorization is realigned.
  - Inconsistency in recording accrued interest across DTs prevented relying on MFS sectoral classification as proxy.
- Recommendations with deadlines:
  - Realign classification of financial instruments and counterpart sectors by December 2023 (H).
  - Resume publication of sectoral distribution of loans and customer deposits by December 2023 (H).
  - Collect data on interest rate receivable/payable by financial instrument and counterpart sectors by December 2023 (H).

### Large exposures, liquidity definitions, and FX positions
- Large exposures:
  - Current national definition (Prudential Standard 1/2011): exposures exceeding 10 percent of capital base (capital and reserves).
  - Mission recommendation: lower threshold for FSIs reporting to 10 percent of Tier 1 capital.
  - Recommendation: BPNG to lower threshold by October 2023.
- Liquidity and short-term liabilities:
  - BPNG continues to use core liquid assets definition (core definition retained despite being phased out in the 2019 FSIs Guide); government securities excluded from core liquid assets due to no active secondary market.
  - Short-term liabilities currently include all time deposits (may mature beyond three months); 2019 FSIs Guide definition: liabilities withdrawable on demand or within three months or less. Mission notes short-term liabilities may be overstated under current definition.
- Net open position in foreign exchange (FX):
  - Current compilation: difference between FX-denominated on-balance sheet assets and liabilities only, based on quarterly call reports.
  - Regulatory weekly reporting required by Prudential Standard 2/2001 for on- and off-balance sheet using Basel shorthand method.
  - Mission advice: use weekly call reports and include off-balance sheet exposures to align with 2019 FSIs Guide.

### Newly compiled FSIs and recommended FSIs for dissemination
- Newly compiled FSIs for DTs:
  - Provisions to NPLs (coverage ratio; new core FSI): specific provisions divided by total gross loans.
  - Spread between reference lending and deposit rates (new core FSI; expressed in basis points): difference between weighted average loan and deposit rates; computed using annualized interest income on loans divided by average non-interbank gross loans and annualized interest expenses on deposits divided by average deposits.
  - Credit growth to the private sector (new additional FSI): year-over-year growth rate of credit to private non-financial corporations and households and NPISHs; compiled using Domestic Location (DL) consolidation basis (to be documented in metadata).
- Additional FSIs for OFCs, ICs, PFs:
  - OFCs: OFCs’ financial assets to total financial system assets; OFCs’ financial assets to gross domestic product (GDP). GDP figures from IMF’s WEO database.
  - LICs: Shareholder equity to total invested assets; Return on assets (ROA); Return on equity (ROE).
  - PFs: Return on assets; Liquid assets to estimated pension payments in the next year.
- Collaboration and data-sharing:
  - OIC welcomed BPNG initiatives; potential for STA remote assistance mapping NLICs bridge tables and aggregating LICs and NLICs. Mission advised formalizing a Memorandum of Understanding between BPNG and OIC for NLICs data and FSIs by December 2023.
- PFs specific actions:
  - Confirm accounting treatment for recording members’ contributions and payment of benefits consistent with Table 5.4 PFs; review treatment by October 2023.

### Data, metadata reporting, and timelines (reporting progress)
- Reporting progress:
  - BPNG started reporting DTs FSIs and metadata in the new templates to STA; published March 2023.
  - Newly compiled FSIs for ICs and PFs scheduled for reporting by October 2023.
- Metadata:
  - BPNG to update FSM and FSIC accompanying FSIs publication; new Tables 2 and 3 contents were discussed and agreed and are consistent with 2019 FSIs Guide.
- Completed recommendations:
  - BPNG reported sectoral financial statements (FSI-SRs) for DTs from 2008/Q4 onwards, the new FSIC, and FSM to STA by March 2023 (Completed).
  - BPNG began regular reporting to STA (FSI-SRs quarterly, FSIC annually, FSM through ICS) with data from 2008/Q4 onwards by March 2023 (Completed).

### Training and technical cooperation
- Mission encouraged BPNG staff compiling FSIs for DTs, ICs and PFs to participate in regional and HQ training courses on financial sector statistics.
- STA offers training at IMF headquarters and regional centers (each course once every two years) and remote courses.

### Selected key FSIs for 2022Q1–2022Q4 (selected figures from Table I; quarterly values preserved)
- Core FSIs (selected):
  - Regulatory capital to risk-weighted assets: 36.3, 37.6, 38.4, 30.4
  - Tier 1 capital to risk-weighted assets: 32.9, 31.9, 30.9, 21.9
  - Nonperforming loans net of provisions to capital: 9.9, 10.1, 10.1, 9.8
  - Tier 1 capital to assets: 13.4, 13.2, 12.6, 9.1
  - Nonperforming loans to total gross loans: 6.0, 6.3, 6.2, 4.8
  - Provisions to nonperforming loans: 41.8, 41.0, 38.9, 39.6
  - Return on assets: 6.0, 5.8, 5.4, 3.9
  - Return on equity: 29.7, 37.0, 36.0, 30.0
  - Interest margin to gross income: 64.7, 64.0, 63.9, 63.9
  - Noninterest expenses to gross income: 39.6, 39.9, 41.3, 44.3
  - Liquid assets to total assets: 19.7, 17.4, 19.9, 22.5
  - Liquid assets to short-term liabilities: 26.2, 23.1, 26.2, 28.6
  - Net open position in foreign exchange to capital: 15.9, 13.9, 9.6, 20.6
- Additional FSIs for Deposit Takers (selected):
  - Large exposures to capital: 58.6, 48.9, 59.5, 85.5
  - Trading income to total income: 13.6, 11.2, 10.9, 3.0
  - Personnel expenses to noninterest expenses: 39.4, 40.7, 39.8, 41.0
  - Spread between reference lending and deposit rates (bp): 947.7, 921.4, 904.0, 744.7
  - Foreign-currency-denominated loans to total loans: 4.2, 4.2, 2.8, 1.9
  - Foreign-currency-denominated liabilities to total liabilities: 2.9, 2.5, 3.0, 2.6
  - Credit growth to private sector: 3.9, 2.2, 6.2, 4.6
- Other financial corporations (selected):
  - OFCs' assets to total financial system assets: total OFCs: 94.5, 94.6, 94.5, 95.2
  - OFCs' assets to total financial system assets: Insurance Corporations: 92.6, 92.8, 92.8, 91.7
  - OFCs' assets to total financial system assets: Pension Funds: 1.8, 1.8, 1.8, 1.8
- Real estate markets (selected):
  - Residential real estate loans to total gross loans: 15.3, 15.2, 15.2, 15.2
  - Commercial real estate loans to total gross loans: 4.4, 4.3, 4.1, 4.0

### Main methodological changes and implementation priorities (selected highlights)
- Net open position in foreign exchange to capital:
  - Numerator: Include on and off-balance sheet exposures using weekly call report (to be implemented).
  - Denominator: No change.
- Large exposures to capital:
  - Numerator: Total exposures above 10 percent of Tier 1 capital (to be implemented).
  - Denominator: Tier 1 capital.
- Provisions to nonperforming loans:
  - New FSI compiled during the mission. Numerator: Specific provisions. Denominator: Nonperforming loans.
- Spread between reference lending and deposit rates (basis points):
  - New FSI compiled during the mission. Numerator: Annualized interest income on loans divided by average loans. Denominator: Annualized interest expenses on deposits divided by average deposits (excluding demand deposits).
- Credit growth to private sector:
  - New FSI compiled during the mission. Credit to private sector includes loans and debt securities to private nonfinancial corporations, households and NPISHs (to be implemented).
- OFCs’ assets to total financial assets and OFCs’ assets to GDP:
  - New FSIs compiled during the mission (numerator and denominator to be implemented).
- Life insurance and pension fund indicators:
  - Several new FSIs compiled during the mission (shareholder equity to total invested assets, ROA, ROE for LICs; liquid assets to estimated pension payments and ROA for PFs).

*Source: IMF – Report on FSI TA Mission, Section I. Detailed Technical Assessment and Recommendations.*

### Section I. Detailed Technical Assessment and Recommendations ...................................................... 8

### Section I. Detailed Technical Assessment and Recommendations

### Action Plan: priorities, milestones, and timeline
- Mission: in-person TA conducted during November 14-18, 2022 in Port Moresby; objectives included: review source data, institutional coverage, accounting and regulatory frameworks for DTs, LICs, PFs; compile FSIs using 2019 FSIs Guide report forms; agree work plan to report FSIs in new forms to STA.
- Key completed priority actions (Target Date: March 2023, Completed; Responsible: BPNG):
  - Report to STA for review the FSI sectoral financial statements (FSI-SRs) for DTs, including balance sheets, income statements, and memorandum series from 2008/Q4 onwards, the new FSI institutional coverage template (FSIC), and the new FSI metadata template (FSM).
  - Start regular reporting to STA FSI-SRs (on a quarterly basis), FSIC (annually) and FSM through the Integrated Collection System (ICS) for disseminating on the IMF’s FSIs website with data starting from 2008/Q4 onwards.
- Priority Action/Milestones (selected, with target dates and priority levels):
  - Start using the revised bridge tables developed by the mission to compile the FSIs for DTs consistent with the 2019 FSIs Guide. Target Completion Date: December 2022 (H) (Completed).
  - Lower the threshold to calculate the value of large exposures from 10 percent of capital and reserves to Tier 1 capital for the purposes of reporting the FSIs. Target Completion Date: October 2023 (M).
  - Compile new FSIs for OFCs (including LICs and PFs), credit to private sector, and interest rate spread on lending and deposit rates for dissemination. Target Completion Date: October 2023 (M).
  - Realign the classification of financial instruments and counterpart sectors in the consolidated balance sheet used to compile the FSIs with the framework already put in place by previous MFS TA missions, which is consistent with the 2019 FSIs Guide and the 2008 System of National Accounts (SNA). Target Completion Date: December 2023 (H).
  - Resume the publication of sectoral distribution of loans and customer deposits in the sectoral balance sheet for compilation of the FSIs. Target Completion Date: December 2023 (H).
  - Collect data on interest rate receivable/ payable by financial instrument and counterpart sector for reporting in FSIs data. Target Completion Date: December 2023 (H).
  - Formalize the memorandum of understanding with the OIC for collection of data and compilation of the FSIs for NLICs. Target Completion Date: December 2023 (H).
  - Review the treatment of contribution and payment of benefits in the preparation of income and expense statement of PFs. Target Completion Date: October 2023 (H).
- Methodological actions:
  - Use revised bridge tables mapping income/expense statements, balance sheets, and memorandum/supervisory series to IMF FSI reporting templates to ensure consistency with 2019 FSIs Guide.
  - Temporarily put on hold reporting of sectoral breakdowns of loans’ assets and deposits’ liabilities in the FSIs until shortfalls (granular accrued interest, short-term liabilities definition, and counterpart classification) are addressed.

### Background and scope of the mission
- First FSIs TA mission for the BPNG; BPNG had been compiling and reporting a set of FSIs to STA prior to the mission.
- Mission outputs:
  - Reviewed source data, institutional coverage, and accounting and regulatory frameworks for DTs, LICs, PFs.
  - Compiled FSIs for DTs, LICs, PFs using the IMF’s 2019 FSIs Compilation Guide and new FSI report forms.
  - Updated/developed bridge tables for DTs, LICs, PFs to map source data to IMF FSI templates.
  - Assisted BPNG to fill FSI institutional coverage (FSIC) and metadata (FSM) report forms.
- Reporting and dissemination:
  - BPNG started reporting FSIs data and metadata for DTs in the new FSI-SRs, FSM, FSIC templates to STA; published on IMF’s FSIs website in March 2023.
  - Newly compiled FSIs for ICs and PFs can be reported by October 2023 for dissemination.
- FSIs coverage guidance:
  - 2019 FSIs Guide recommends compiling and disseminating 17 core and 12 additional FSIs for DTs, and 23 additional FSIs for other sectors.
  - IMF’s FSI data portal disseminates FSIs data and metadata of 146 countries.

### Overview of the financial system in Papua New Guinea (structure, roles, and supervision)
- BPNG roles:
  - Performs traditional central banking functions and acts as supervisory authority for commercial banks, credit institutions, development bank, LICs and PFs.
  - Responsibility to compile FSIs reassigned to newly created Financial Systems Development Department (FSDD).
- Relative size:
  - DTs account for approximately 75 percent of the total financial system assets.
  - OFCs sector holds approximately 25 percent of total assets of the financial system.
- Institutional features (textual summary):
  - Banking sector: two domestically controlled banks and two foreign controlled subsidiaries; two domestically controlled banks occupy around 80 percent of banking sector total assets; one domestically controlled bank is a domestic systemically important bank with about 70 percent of total assets of the commercial banks.
  - Other DTs: nine licensed financial institutions, sixteen savings/credit cooperatives, and four microfinance institutions; these institutions account for less than 9 percent of the DTs financial assets. Savings/credit cooperatives (licensed under the Savings and Loan Societies Act, 1915) are currently not included in the compilation of FSIs.
  - OFCs: four superannuation funds (authorized under Superannuation (General Provisions) Act 2000) are the largest subcomponent of OFCs, accounting for 22 percent of total financial assets. Insurance subsector: five life and thirteen non-life ICs; LICs supervised by BPNG under Life Insurance Act 2000; NLICs supervised by OIC—data for eight out of thirteen NLICs are currently unavailable to BPNG due to no formal data-sharing arrangement with OIC.
  - State-owned bank: does not take deposits and holds 1.0 percent share of total financial system assets.
  - Remaining OFCs: 24 small financial corporations account for less than 0.5 percent of total financial assets.

### The financial sector: key statistics (as reported)
- Table: Papua New Guinea: The Financial Sector (as provided)
  - Deposit Takers: Number of Institutions 33; Total Assets (Million, Kina) 54,911; Share in Total Assets (in percent) 75.2
  - Commercial banks: Number of Institutions 4; Total Assets (Million, Kina) 50,100; Share in Total Assets (in percent) 68.6
    - o/w domestically controlled: Number of Institutions 2; Total Assets (Million, Kina) 39,893; Share in Total Assets (in percent) 54.6
    - o/w foreign controlled subsidiary: Number of Institutions 2; Total Assets (Million, Kina) 10,207; Share in Total Assets (in percent) 14.0
  - Licensed financial institutions: Number of Institutions 9; Total Assets (Million, Kina) 2,280; Share in Total Assets (in percent) 3.1
    - o/w FX Dealers: Number of Institutions 2; Total Assets (Million, Kina) 1,020; Share in Total Assets (in percent) 1.4
  - Savings/credit cooperatives: Number of Institutions 16; Total Assets (Million, Kina) 1,608; Share in Total Assets (in percent) 2.2
  - Microfinance institutions: Number of Institutions 4; Total Assets (Million, Kina) 922.5; Share in Total Assets (in percent) 1.3
  - Other Financial Corporations: Number of Institutions 39; Total Assets (Million, Kina) 18,092; Share in Total Assets (in percent) 24.8
    - Pension funds: Number of Institutions 4; Total Assets (Million, Kina) 16,022; Share in Total Assets (in percent) 21.9
    - Insurance o/w life insurance: Number of Institutions 5; Total Assets (Million, Kina) 232.7; Share in Total Assets (in percent) 0.3
    - Insurance o/w nonlife insurance: Number of Institutions 13; Total Assets (Million, Kina) 848.4; Share in Total Assets (in percent) 1.2
    - State-owned bank: Number of Institutions 1; Total Assets (Million, Kina) 721.4; Share in Total Assets (in percent) 1.0
    - Fund Administers: Number of Institutions 3; Total Assets (Million, Kina) 40.4; Share in Total Assets (in percent) 0.1
    - Investment Managers: Number of Institutions 4; Total Assets (Million, Kina) 63.8; Share in Total Assets (in percent) 0.1
    - Life Insurance Brokers: Number of Institutions 6; Total Assets (Million, Kina) 156.4; Share in Total Assets (in percent) 0.2
    - Money Changers: Number of Institutions 8; Total Assets (Million, Kina) 6.5; Share in Total Assets (in percent) 0.01
    - Money Remitters: Number of Institutions 2; Total Assets (Million, Kina) Not available; Share in Total Assets (in percent) -
    - Mobile Network Operators: Number of Institutions 1; Total Assets (Million, Kina) Not available; Share in Total Assets (in percent) -
  - Total: Number of Institutions 72; Total Assets (Million, Kina) 73,002; Share in Total Assets (in percent) 100
- Notes:
  - Data for commercial banks are as of December 2021 and for the other institutions are as of December 2020. For NLICs, the data are aggregate over five out of thirteen corporations which are currently available to the BPNG.

### Institutional coverage and consolidation basis
- FSIs compilation approaches used:
  - Cross-border, cross-sector, domestically incorporated (CBCSDI) consolidation for DTs.
  - Aggregate resident-based approach (ARBA) for LICs and PFs.
- Current institutional coverage for DTs:
  - Four commercial banks (and their deposit-taking and non-deposit-taking subsidiaries), four deposit-taking microfinance institutions, and nine licensed financial institutions.
- Coverage for LICs and PFs:
  - LICs: coverage comprises four LICs.
  - PFs: coverage comprises four superannuation funds.
- Gaps and potential extensions:
  - There are currently eight NLICs whose data are not available to BPNG because there is yet no formal arrangement with the OIC for data sharing; once available, coverage for ICs could be extended to include NLICs.
- Source data adequacy:
  - Source data for compiling FSIs for DTs, ICs, and PFs are adequate and generally meet criteria established by the 2019 FSIs Guide.

### Accounting, regulatory frameworks, and methodological issues identified
- Regulatory and accounting frameworks:
  - Broadly consistent with Basel I and International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS).
  - Minimum required capital adequacy ratio is currently at 12 percent for all commercial banks.
  - Components of regulatory capital and risk weighted assets are broadly consistent with Basel I framework; any deviations need to be documented in metadata.
  - Banks adopted IFRS9 for valuation of financial instruments since 2020 and relied on a mixture of supervisory method and IFRS9’s expected credit losses to calculate the minimum provisioning requirements.
- Identified areas for improvement and methodological shortfalls:
  - Need to collect granular data on accrued interest receivable/payable by financial instrument and counterpart sector.
  - Change the definition of short-term liabilities to not less than three months.
  - Realign classification of counterpart sectors in the consolidated financial statements used to compile FSIs in line with monetary and financial statistics (MFS) to ensure greater consistency with data reported to the IMF.
  - Until shortfalls are addressed, reporting of sectoral breakdowns of loans’ assets and deposits’ liabilities in the FSIs was temporarily put on hold.
- Metadata and institutional coverage:
  - Mission updated the metadata and institutional coverage report forms (FSM and FSIC); contents of new Tables 2 and 3 of the metadata were broadly discussed and agreed with BPNG staff and are consistent with the 2019 FSIs Guide.
  - Publication of metadata will provide additional information to users on structure of banking sector and national accounting and regulatory frameworks underpinning FSI production.

### Outputs, reporting plan, and next steps
- FSIs compiled and to be regularly reported to STA:
  - Two new core and one additional FSIs for DTs; two additional FSIs on the size of OFCs subsector; three additional FSIs for LICs; two additional FSIs for PFs.
  - Revisions recommended to several DTs FSIs to ensure consistency with methodological changes introduced in the 2019 FSIs Guide.
- Reporting timeline agreed:
  - BPNG started reporting DTs FSIs and metadata in the new templates to STA; published March 2023.
  - Newly compiled FSIs for ICs and PFs scheduled for reporting by October 2023.
- Action plan prepared by mission contains detailed steps, priority recommendations (summarized above), milestones, and responsible institutions.

*Source: IMF – Report on FSI TA Mission, Section I. Detailed Technical Assessment and Recommendations.*

### 16.      The FSIs for DTs are compiled using CBCSDI consolidation basis. The CBCSDI is the

### 1pngea2023003 - 16. The FSIs for DTs are compiled using CBCSDI consolidation basis. The CBCSDI is the

### Consolidation basis, institutional coverage, and distress treatment
- The FSIs for DTs are compiled using CBCSDI consolidation basis (recommended method of the 2019 FSIs Guide).
- CBCSDI is consistent with BCBS guidance requiring application of the same supervisory standards to domestic and foreign-owned banks and for effective consolidated supervision of all domestic and foreign operations within a banking group.
- In Papua New Guinea consolidated financial statements are derived from the accounting framework, which may not yield the same outcome as the Basel framework.
- The mission could not confirm the treatment of insurance subsidiaries/associates in the consolidation financial statement due to time constraint. Instead, the BPNG agreed to follow up with the concerned bank to confirm the treatment of the insurance and document any methodological deviation relating to consolidation method in the metadata.
- Institutional coverage for DTs comprises:
  - one banking group (and its domestic and foreign DTs and non-DTs subsidiaries),
  - three commercial banks,
  - four deposit-taking microfinance institutions, and
  - nine financial institutions.
- Currently there are no DTs in receivership/liquidation in Papua New Guinea.
- The 2019 FSIs Guide recommends including DTs in distress if they hold significant positions and to compile FSIs both including and excluding these DTs. If excluded, this should be stated in the FSIC.

### Insurance companies (ICs), pension funds (PFs), and ARBA
- The mission assisted BPNG to compile new additional FSIs for LICs and PFs using ARBA.
- ARBA consists of simple aggregation of the income and expense statements, balance sheets and memorandum series of LICs and PFs. No intragroup adjustments are needed since insurance laws and regulations require ICs to conduct their LICs and NLICs in separate units while PFs operate as separate entities.
- FSIs for ICs currently comprise five LICs only. BPNG is expected to expand coverage to include NLICs after data-sharing agreement with the OIC.
- For PFs, coverage comprises the four superannuation funds.

### Accounting and regulatory frameworks underlying FSI data
- Commercial banks adopted IFRS9 in 2020. Prior to IFRS9, IAS39 was used for valuation of financial instruments.
- Under IFRS9, financial instruments are valued at amortized cost, fair value through other comprehensive income (FVOIC) and fair value through profit and loss (FVTPL).
- Banks have adopted expected credit losses, alongside supervisory method, to calculate loans loss provisioning requirements.
- For ICs and PFs, realized and unrealized gains/losses on investments in financial instruments are mostly valued at FVTPL.
- The 2019 FSIs Guide recommends collecting and disseminating data on other comprehensive income in income and expense statements for DTs, ICs and PFs. A new line item after current year results records movements in other comprehensive income during the period, covering, among others, unrealized gains/losses on financial instruments valued at FVOIC.

### Asset quality: NPLs and provisioning
- NPLs are defined as loans that are past due for 90 days or more.
- NPLs and minimum provisions requirements are defined in BPNG’s prudential standard 2/2003 on asset classification, provisioning, and suspension of interest.
- Loans are considered NPLs when any portion of principal or interest which is due and unpaid for 90 days or more, or interest payments for 90 days or more have been capitalized, refinanced, or rolled over into a new loan.
- The national NPL definition is broadly consistent with the 2019 FSIs Guide but does not cover cases where there is evidence to reclassify NPLs before they are past due for 90 days (e.g., debtor files for bankruptcy).
- Classification mapping:
  - NPLs comprise past due loans that are classified as substandard, doubtful and loss.
  - Performing loans comprise loans that are classified as pass or acceptable and special mention.
  - Provisions on performing and NPLs are classified as general and specific provisions, respectively.
  - Level of general and specific provisions is determined according to number of days past due (Table 3).
  - When loans are classified as NPLs, they are placed on non-accrual status.

- Table 3: Papua New Guinea: Loans Classification and Minimum Provisioning Requirements
  - Pass or Acceptable: Number of days past due 0-59; Minimum provisions (in percent) 1
  - Special mention: Number of days past due 60-89; Minimum provisions (in percent) 5
  - Substandard: Number of days past due 90-179; Minimum provisions (in percent) 25
  - Doubtful: Number of days past due 180-359; Minimum provisions (in percent) 50
  - Loss: Number of days past due more than 360; Minimum provisions (in percent) 100

### Capital adequacy and risk-weighting
- Capital adequacy ratios of banks follow mainly Basel I Capital Accord.
- Papua New Guinea banks have adopted a simplified definition of Basel’s leverage ratio: ratio of Tier 1 capital to total assets (after adjusting for deduction specific to Tier 1 capital).
- Components of regulatory capital and RWAs are prescribed by BPNG’s prudential standard 1/2003 on capital adequacy.
  - Tier 1 capital comprises permanent shareholders’ equity (issued and fully paid-up ordinary shares and non-cumulative perpetual preference shares) plus disclosed reserves (additional paid-in share premium plus retained earnings or undistributed profits) and minority interests in the equity of consolidated subsidiaries, less: goodwill and other eligible supervisory deductions.
  - Tier 2 capital consists of current year’s interim profits (or losses), undisclosed reserves, asset revaluation reserves (if allowed by the Bank and consistent with applicable accounting standards), general loan loss provisions (not exceeding 1.25 per cent of total risk-weighted assets), qualifying subordinated term debt, and hybrid debt-equity capital instruments. Tier 2 capital is limited to a maximum of 100% of Tier 1 capital.
  - Total regulatory capital is the sum of the Tier 1 and 2 capitals (net of deductions).
  - Total RWAs are calculated following the Basel I’s standardized approach for credit risk. Off-balance sheet credit exposures are converted into their credit equivalent amounts by multiplying nominal amounts with their respective credit conversion factor, ranging from 0–100 percent depending on type of transaction and maturity, before risk weights are applied.
  - A zero percent conversion factor is applied to commitments with an original maturity of up to one year, or which can be unconditionally canceled at any time.

- Basel I framework applied uniformly to all commercial banks, licensed financial institutions and microfinance institutions.
- Minimum required capital adequacy ratio: 12.0 percent.
- Minimum Tier 1 capital ratio: 8.0 percent.
- Minimum leverage capital ratio: 6.0 percent.
- A higher minimum may be prescribed when a bank is pursuing or experiencing significant growth and has inadequate risk management systems, an inordinate level of risk, or less than satisfactory asset quality, management, earnings or liquidity.

- Table 4: Papua New Guinea: Summary of Risk-Weighted Coefficients (selected entries)
  - Risk weight 0 percent:
    - Cash; Claims on and balances with the BPNG; Claims, or portions thereof, on, guaranteed by, or fully secured by securities issued by the Government of Papua New Guinea; Claims on central governments and central banks denominated in national currency and funded in that currency; Other claims on OECD central governments and central banks; Claims, or portions thereof, collateralized by securities of, or guaranteed by, OECD central governments; and Claims, or portions thereof, fully secured by cash or pledged deposits in the same bank.
  - Risk weight 20 percent:
    - Claims on multilateral development banks (The International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Investment Bank, or others as may be approved by the BPNG) and claims, or portions thereof, guaranteed by, or collateralized by, securities issued by such banks; Claims on, and loans, or portions thereof, guaranteed by, banks incorporated in the OECD countries, domestic commercial banks and other banks incorporated in countries outside the OECD with a residual maturity of up to one year; Claims on, and loans, or portions thereof, guaranteed by, non-domestic OECD public-sector entities, excluding the central government, subject in all cases to prior approval of the BPNG; and Cash items in process of collection.
  - Risk weight 50 percent:
    - Loans fully secured by mortgages on residential property that are or will be occupied by the borrowers or that are rented; Claims on, and loans, or portions thereof, guaranteed by, provincial governments of Papua New Guinea; and Claims on public enterprises as approved by the BPNG.
  - Risk weight 100 percent:
    - Claims on the private sector; Claims on, or loans guaranteed by, domestic commercial banks and other banks incorporated outside the OECD with a residual maturity of over one year; Claims on central governments outside the OECD (unless denominated in and funded in national currency); Other claims on public sector entities not rated at 50 percent; Claims on commercial companies owned by public sector entities; Claims on local governments in Papua New Guinea; Premises, plant and equipment and other fixed assets; Real estate owned and other investments (including non-consolidated investment participations in other companies); Capital instruments issued by other banks (unless deducted from capital); and All other assets, excluding those deducted from capital.

### Source data and reporting forms
- Source data from DTs, LICs and PFs are broadly adequate to compile the FSIs for Papua New Guinea. Source data cover income and expense statements, balance sheets and memorandum series collected quarterly as described in respective charts of accounts, plus supervisory series for DTs (capital adequacy, asset quality, earnings and profitability, liquidity, net open positions in FX).
- FSIs are calculated using the following prudential reports reported to BPNG quarterly:
  - DTs: Call Returns 1.1. Balance Sheet
  - DTs: Call Returns 1.2. Balance Sheet - Supporting Details
  - DTs: Call Returns 2.1. Income Statement
  - DTs: Call Returns 3.1. Loan Book Reconciliation
  - DTs: Call Returns 3.2. Largest Loan Relationships
  - DTs: Call Returns 4.1. Delinquent Loans
  - DTs: Call Returns 4.3. Deposit Composition
  - DTs: Call Returns 5.1. Capital Adequacy - Risk Weight Assets
  - DTs: Call Returns 5.2. Capital Adequacy - Capital Components
  - DTs: Call Returns 8.1. Market Sensitivity
  - LICs: Life Insurance Companies Returns Form 1. Statement of Revenue and Distribution
  - LICs: Life Insurance Companies Returns Form 2. Balance Sheet
  - LICs: Life Insurance Companies Returns Form 3. Statement of Premium and Commission
  - LICs: Life Insurance Companies Returns Form 6. Statement of General Expenses
  - PFs: Form ASF-1. Statement of Change in Net Assets
  - PFs: Form ASF-2. Statement of Net Assets

- Source data from NLICs need to be supplemented by those shared by the OIC before compiling FSIs for the whole insurance sector.
  - Only source data from NLICs currently available to BPNG is balance sheet data to compile SRF 4SR for MFS.
  - Five out of thirteen NLICs are voluntarily reporting balance sheet data to BPNG.
  - After BPNG and OIC agree to share remaining balance sheet and income/expense statements data, BPNG is expected to start compiling FSIs for the whole insurance sector.

### Compilation framework, bridge tables, and expanded FSIs
- Mission updated bridge tables to compile core and additional FSIs for DTs for transmission to STA, and developed new bridge tables to compile additional FSIs for LICs and PFs.
- Process involved mapping source data to tables 5.1 DT, 5.3.1 LICs and 5.4 PFs of the FSI-SRs and deriving FSIs from underlying data in FSD sheet.
- Bridge tables show classification of each item in income and expense statement, balance sheet and memorandum series and were provided to BPNG.
- Mission expanded list of FSIs reported to STA. New FSIs compiled comprise:
  - two new core and one additional FSIs for DTs;
  - two additional FSIs on the size of OFC’s subsector;
  - two additional FSIs for LICs; and
  - two additional FSIs for PFs.
- All FSIs are to be compiled and reported to STA on a quarterly basis.
- Differences exist between existing FSIs compiled by BPNG and those developed during the mission; mission FSIs based on 2019 FSIs Guide methodologies. Differences explained in Appendix C.
- Recommendation (completed): The BPNG to start using the revised bridge tables developed by the mission to compile the FSIs for DTs consistent with the 2019 FSIs Guide by December 2022 (completed).

### Deposit Takers: sectoral financial statements, reclassifications, and data issues
- Mission updated bridge tables to compile FSIs for DTs; several accounts were reclassified in sectoral financial statements in Table 5.1 DTs.
- Table 5: Papua New Guinea: Reclassification of main accounts in Table 5.1 DTs
  - Income and Expense Statement:
    1. Other (Advisory Fees, etc.) reclassified to other income from fees and commissions receivable
    2. Extraordinary profit/losses reclassified to other income/expenses from extraordinary profits/losses
  - Balance Sheet:
    3. Other assets reclassified to other financial assets from nonfinancial assets
    4. Suspended interest deducted from gross loans (and not as specific provisions)
    5. General loan loss provisions reclassified to general and other provisions from capital and reserves

- Extraordinary profits/losses reclassified to other income/expenses consistent with 2019 FSIs Guide (follows IAS1 which does not include a separate line item for extraordinary items). This reclassification may require restatement of past profitability indicators that use noninterest income, gross income, and noninterest expenses.
- Classifications of financial instruments are broadly adequate to compile sectoral balance sheet in Table 5.1 of FSI-SRs. However:
  - Lack of granular data on accrued interest receivable/payable by financial instruments and counterpart sectors led to proportional allocation of interest receivable/payable to respective financial instruments and counterpart sectors.
  - Mission recommends BPNG collect granular breakdown of accrued interest by financial instruments and counterpart sectors in consolidated financial statements used to compile FSIs to ensure greater consistency with 2019 FSIs Guide.
- Current classification of counterpart sectors in consolidated financial statements is not fully consistent with 2019 FSIs Guide. Major differences exist between classifications used by BSD and those used to compile MFS; inconsistencies prevented proper mapping of sectoral distribution of loans and deposits in Table 5.1 DTs.
  - Mission advised pausing reporting of distribution of loans and deposits until properly sectorized.
  - System of classification of counterpart sectors used for MFS should serve as reference to improve sectorization in consolidated financial statements used by BSD (broadly aligned with MFSMCG, 2019 FSIs Guide, and 2008 SNA).
- Inconsistency in recording of accrued interests in call reports of DTs: some DTs report financial instruments gross of accrued interests while others report accrued interests in other assets/liabilities. This inconsistency prevented relying on MFS sectoral classification as proxy to construct sectoral breakdown in table 5.1 DTs.
  - 2019 FSIs Guide recommends financial instruments are recorded together with gross of accrued interests.

- Recommendations (with deadlines):
  - The BPNG to realign the classification of financial instruments and counterpart sectors in the consolidated balance sheet used to compile the FSIs with the framework already put in place by previous MFS TA missions, which is consistent with the 2019 FSIs Guide and the 2008 System of National Accounts SNA, by December 2023.
  - The BPNG to resume the publication of sectoral distribution of loans and customer deposits in the sectoral balance sheet for compilation of the FSIs by December 2023.
  - The BPNG to collect data on interest rate receivable/ payable by financial instrument and counterpart sectors for reporting in FSIs data by December 2023.

*IMF | Technical Report – Papua New Guinea   Report on FSI TA Mission*

### 35.      Large exposures are compiled using national definition. Large exposures are defined in the

### Large exposures are compiled using national definition. Large exposures are defined in the

### Definitions, compilation choices, and recommended adjustments
- Large exposures (national definition per BPNG’s Prudential Standard 1/2011):
  - Defined as the sum of all credit exposures to a single counterpart or to a group of closely related counterparts that in aggregate amount exceeds a 10 percent of capital base.
  - Total exposures comprise any direct or indirect advance of funds made to a counterpart based on an obligation to repay the funds advanced, or which is repayable from specific property pledged by or on behalf of a counterpart.
- Mission recommendation to align with the 2019 FSIs Guide:
  - Adjust the threshold to report large exposures from 10 percent of capital and reserves to 10 percent of Tier I capital.
- Recommendation (explicit):
  - The BPNG to lower the threshold to calculate the value of large exposures from 10 percent of capital and reserves to tier 1 capital for the purpose of calculating the FSIs by October 2023.

### Liquidity and short-term liabilities definitions
- BPNG decision:
  - Continue using the definition of core liquid assets (core definition retained despite being phased out in the 2019 FSIs Guide).
  - Government securities are excluded from core liquid assets because there is no active secondary market in Papua New Guinea.
- Short-term liabilities:
  - BPNG’s current definition covers all time deposits, which may have maturity of more than three months.
  - 2019 FSIs Guide definition: liabilities withdrawable on demand or within three months or less.
  - Mission notes that short-term liabilities as currently defined by BPNG may be overstated relative to the 2019 FSIs Guide.

### Net open position in foreign exchange (FX)
- Current practice:
  - Net open position in FX calculated as the difference between FX denominated on-balance sheet assets and liabilities only, based on quarterly call reports of DTs.
- Regulatory/reporting requirement:
  - BPNG Prudential Standard 2/2001 requires weekly reporting of net open position in FX for on- and off-balance sheet using Basel’s shorthand method.
- Mission advice:
  - Use the weekly call reports to compile net open position in FX to be consistent with the 2019 FSIs Guide.

### Newly compiled FSIs for Deposit Takers (DTs)
- Two newly introduced core FSIs and one additional FSI compiled for DTs (source data available from call reports and consistent with 2019 FSIs Guide):
  - Provisions to NPLs (coverage ratio; new core FSI):
    - Calculated as specific provisions divided by total gross loans.
  - Spread between reference lending and deposit rates (new core FSI; expressed in basis points):
    - Measures difference between weighted average loan and deposit rates.
    - Following second approach in 2019 FSIs Guide: weighted averages approximated using annualized interest income on loans divided by average non-interbank gross loans and annualized interest expenses on deposits divided by average deposits.
    - Average reference lending and deposit rates cover resident and nonresident positions.
  - Credit growth to the private sector (new additional FSI for DTs):
    - Measures year-over-year growth rate of credit to private non-financial corporations and households and nonprofit institutions serving households (NPISHs).
    - Intended as a forward-looking indicator of emerging systemic risks and potential asset quality problems.
    - Source data derived from MFS (SRF 2SR); adequate for local jurisdiction because loans and debt securities to nonresidents (including those of overseas DT subsidiaries) are to be excluded.
    - Compiled using Domestic Location (DL) consolidation basis; this DL basis needs to be documented in the metadata.
- Recommendation (explicit):
  - The BPNG to compile credit to private sector and interest rate spread on lending and deposit rates for dissemination by December 2023.

### Additional FSIs for Other Financial Corporations (OFCs), Insurance Corporations (ICs), and Pension Funds (PFs)
- OFCs:
  - Two additional FSIs compiled for quarterly reporting to STA:
    - OFCs’ financial assets to total financial system assets.
    - OFCs’ financial assets to gross domestic product (GDP).
  - These two FSIs also compiled for ICs and PFs.
  - GDP figures are derived from IMF’s WEO database.
  - Note: No money market funds operating in Papua New Guinea.
- Insurance corporations (ICs):
  - IC sector in Papua New Guinea: four LICs and five NLCs; no composite ICs (life and non-life produce separate financial statements).
  - Mission constructed bridge tables mapping SRF-4SR to Table 5.3.1 LICs of the FSIs-SRs.
  - Three additional FSIs for LICs compiled:
    - Shareholder equity to total invested assets:
      - Numerator: capital and reserves.
      - Denominator: sum of LICs’ holdings of currency and deposits, loans, debt securities, equity and investment fund shares, other financial assets, financial derivatives, and nonfinancial assets held for investment purposes.
    - Return on assets (ROA):
      - Calculated as annualized net profit before tax divided by average total assets of LICs.
    - Return on equity (ROE):
      - Calculated as annualized net profit after tax divided by average capital and reserves of LICs.
  - Collaboration with OIC:
    - OIC welcomed BPNG initiatives; indicated no objection to sharing profitability data of NLICs with BPNG.
    - Agreed potential for STA to provide remote assistance to map bridge tables for NLICs and aggregate LICs and NLICs to produce FSIs for ICs.
    - Mission advised BPNG and OIC to formalize a Memorandum of Understanding for sharing and dissemination of aggregate data (including FSIs) on NLICs.
  - Recommendation (explicit):
    - The BPNG to formalize the memorandum of understanding with OIC for collection of data and the compilation of the FSIs for NLICs by December 2023.
- Pension Funds (PFs / superannuation funds):
  - Superannuation funds classified as OFCs in IFS financial corporations’ survey.
  - Four superannuation funds established under Papua New Guinea Superannuation Act 2000 and supervised by BPNG.
  - BPNG confirmed none of the superannuation funds currently rely on government funding to pay member pension contributions; operate as defined benefit pension plans investing contributions in financial assets and properties.
  - Mission developed bridge tables and compiled two additional FSIs for PFs; source data (income and expense statements, balance sheets, memorandum series) broadly adequate but with some issues:
    - Absence of granular revenue/expense details limited full disaggregation in Table 5.4 PFs.
    - Inconsistencies found in reporting of accrued revenue and expenses between call reports of PFs and their audited financial statements; further examination required.
    - Mission advised BPNG to confirm accounting treatment for recording members’ contributions and payment of benefits is consistent with Table 5.4 PFs in new FSIs templates.
  - Two additional FSIs for PFs compiled:
    - Return on assets:
      - Calculated as annualized net profits/losses before tax divided by average total assets (annualized net profits and total assets calculated using same framework as for DTs).
    - Liquid assets to estimated pension payments in the next year:
      - Numerator: liquid assets (cash, placements with commercial banks, investment in government securities with maturity of 12 months).
      - Denominator: estimated pension payments defined in 2019 FSIs Guide as sum of actuarially expected payments to beneficiaries by PFs during the past two months.
  - Recommendations (explicit):
    - The BPNG to compile new FSIs for OFCs (including LICs and PFs) for dissemination by October 2023.
    - The BPNG to review the treatment of contribution and payment of benefits in the preparation of income and expense statement of PFs by October 2023.

### Data, metadata reporting, and timelines
- Reporting progress:
  - BPNG started to report FSIs for DTs to STA for dissemination in March 2023 after mapping source data to new FSI-SRs.
  - BPNG aligned FSI definitions produced with the 2019 FSIs Guide.
  - BPNG needs to align FSIs data published on its website with the new definitions reported to STA.
- Metadata updates:
  - BPNG needs to update metadata (FSM and FSIC) for DTs accompanying the publication of FSIs in March 2023.
  - Contents of new Tables 2 and 3 of the metadata for Papua New Guinea were discussed and agreed with BPNG staff and are consistent with 2019 FSIs Guide requirements.
  - BPNG should indicate presence of any DTs in liquidation (if any) not included in FSIC coverage.
- Completed recommendations (explicit):
  - The BPNG to report to STA for review the sectoral financial statements (FSI-SRs) for DTs, including balance sheets, income statements, and memorandum series form 2008/Q4 onwards, the new FSIC template and the new FSI metadata template (FSD) by March 2023 (Completed).
  - The BPNG to start regular reporting to STA, FSI-SRs (on a quarterly basis), FSIC (annually), and FSM through the ICS for disseminating on the IMF’s FSIs data portal with data starting from 2008/Q4 onwards by March 2023 (Completed).

### Training and technical cooperation
- Mission encouragement:
  - BPNG staff compiling FSIs for DTs, ICs and PFs encouraged to participate in regional and HQ training courses on financial sector statistics.
  - STA delivers training at IMF headquarters and regional centers (each course once every two years) and remote courses; details on IMF Institute for Capacity Development webpage.

### Key FSIs for 2022Q1–2022Q4 (selected figures from Table I)
- Core FSIs (selected):
  - Regulatory capital to risk-weighted assets: 36.3, 37.6, 38.4, 30.4
  - Tier 1 capital to risk-weighted assets: 32.9, 31.9, 30.9, 21.9
  - Nonperforming loans net of provisions to capital: 9.9, 10.1, 10.1, 9.8
  - Tier 1 capital to assets: 13.4, 13.2, 12.6, 9.1
  - Nonperforming loans to total gross loans: 6.0, 6.3, 6.2, 4.8
  - Provisions to nonperforming loans: 41.8, 41.0, 38.9, 39.6
  - Return on assets: 6.0, 5.8, 5.4, 3.9
  - Return on equity: 29.7, 37.0, 36.0, 30.0
  - Interest margin to gross income: 64.7, 64.0, 63.9, 63.9
  - Noninterest expenses to gross income: 39.6, 39.9, 41.3, 44.3
  - Liquid assets to total assets: 19.7, 17.4, 19.9, 22.5
  - Liquid assets to short-term liabilities: 26.2, 23.1, 26.2, 28.6
  - Net open position in foreign exchange to capital: 15.9, 13.9, 9.6, 20.6
- Additional FSIs for Deposit Takers (selected):
  - Large exposures to capital: 58.6, 48.9, 59.5, 85.5
  - Trading income to total income: 13.6, 11.2, 10.9, 3.0
  - Personnel expenses to noninterest expenses: 39.4, 40.7, 39.8, 41.0
  - Spread between reference lending and deposit rates (bp): 947.7, 921.4, 904.0, 744.7
  - Foreign-currency-denominated loans to total loans: 4.2, 4.2, 2.8, 1.9
  - Foreign-currency-denominated liabilities to total liabilities: 2.9, 2.5, 3.0, 2.6
  - Credit growth to private sector: 3.9, 2.2, 6.2, 4.6
- Other financial corporations (selected):
  - OFCs' assets to total financial system assets: total OFCs: 94.5, 94.6, 94.5, 95.2
  - OFCs' assets to total financial system assets: Insurance Corporations: 92.6, 92.8, 92.8, 91.7
  - OFCs' assets to total financial system assets: Pension Funds: 1.8, 1.8, 1.8, 1.8
- Real estate markets (selected):
  - Residential real estate loans to total gross loans: 15.3, 15.2, 15.2, 15.2
  - Commercial real estate loans to total gross loans: 4.4, 4.3, 4.1, 4.0

### Main methodological changes from the Technical Assistance (selected highlights from Appendix C)
- Net open position in foreign exchange to capital:
  - Numerator: Include on and off-balance sheet exposures using weekly call report (to be implemented).
  - Denominator: No change.
- Large exposures to capital:
  - Numerator: Total exposures above 10 percent of Tier 1 capital (to be implemented).
  - Denominator: Tier 1 capital.
- Provisions to nonperforming loans:
  - New FSI compiled during the mission.
  - Numerator: Specific provisions.
  - Denominator: Nonperforming loans.
- Spread between reference lending and deposit rates (basis points):
  - New FSI compiled during the mission.
  - Numerator: Annualized interest income on loans divided by average loans.
  - Denominator: Annualized interest expenses on deposits divided by average deposits (excluding demand deposits).
- Credit growth to private sector:
  - New FSI compiled during the mission.
  - Credit to private sector includes loans and debt securities to private nonfinancial corporations, households, and other domestic sectors (to be implemented).
- OFCs’ assets to total financial assets and OFCs’ assets to GDP:
  - New FSIs compiled during the mission (numerator and denominator to be implemented).
- Life insurance and pension fund indicators:
  - Several new FSIs compiled during the mission (shareholder equity to total invested assets, ROA, ROE for LICs; liquid assets to estimated pension payments and ROA for PFs).

*Source: BPNG and IMF staff, Report on FSI TA Mission (selection of text and tables).*

### APPENDIX D. FSI METADATA FOR DEPOSIT TAKERS

### APPENDIX D. FSI METADATA FOR DEPOSIT TAKERS

### Purpose and scope of metadata
- Metadata should be disseminated together with FSI data to facilitate data interpretation.
- Metadata include information about FSIs and their compilation, such as data definitions, how data are consolidated, supervisory and accounting rules adopted by the reporting banks, institutional coverage, and data sources.

### Method of consolidation
- FSIs are compiled for DTs on a CBCSDI (except for credit growth to private sector, which is compiled using Domestic Location (DL) consolidation basis) and for ICs and PFs on an ARBA.

### Institutional coverage
- DTs comprise two subsidiaries of foreign banks and fifteen domestically controlled banks.
- ICs cover four ICs and five NLICs.
- PFs comprise four superannuation funds.

### Consolidation adjustments
- Intra-group consolidation adjustments are fully reflected for DTs.
- No adjustments are affected for ICs since insurance laws and regulations require ICs to conduct life and nonlife activities separately.

### Residence of institutional units
- The classifications of financial instruments in the consolidated balance sheet of banks are adequate consistent with the 2019 FSIs Guide.
- The classification of counterpart sectors should be realigned with the current framework that was developed by the previous MFS TA missions to ensure greater consistency in the financial institutions data that are reported to the IMF.

### Accounting framework
- The DTs are required to prepare their financial statements in IFRS.
- The accounting principles of accrual, time of recording and exchange rate are broadly consistent with IFRS9.

### Regulatory framework
- The regulatory framework for compiling the capital adequacy ratios of banks follows mainly Basel I Capital Accord.
- Some elements of Basel III’s leverage ratio requirements have been adopted.

Tier 1 and Tier 2 capital
- Tier 1 capital comprises permanent shareholders’ equity plus disclosed reserves and minority interests in the equity of consolidated subsidiaries which are less than wholly owned, less: goodwill and other intangible assets, future income tax benefits, operating losses carried forward and encumbered assets.
- Tier 2 capital consists of current year’s interim profits (or losses), undisclosed reserves, asset revaluation reserves, general loan loss provisions, subordinated term debt, and hybrid debt-equity capital instruments.
- Tier 2 capital is limited to a maximum of 100% of Tier 1 capital.
- Total regulatory capital is sum of Tier 1 capital and Tier 2 capital after application of all deductions.

Risk-weighted assets and credit risk
- Risk-Weighted Assets are calculated using mostly the Basel I’s standardized approach for credit risk.
- Nonperforming Loans (NPL) are defined as any portion of principal or interest which is due and unpaid for 90 days or more and interest payments for 90 days or more have been capitalized, refinanced, or rolled over into new loans.
- Large exposures are defined in the BPNG’s Prudential Standard 1/2011 as the sum of all credit exposures, to a counterparty or group of connected counterparties, whose (aggregate) amount exceeds a 10 percent of capital and reserves.
- Credit to private sector include loans to private and public nonfinancial corporations, households and nonprofit institutions serving households (NPISHs) and other residual sector and debt securities issued by nonfinancial corporations consistent with the 2019 FSIs Guide.

### Performance and liquidity metrics
- Return on assets is calculated as the ratio of annualized net income before tax divided by average total assets.
- Return on equity is calculated as the ratio of annualized net income after tax divided by average capital and reserves.
- Liquid assets consist of cash, deposits with central bank (including cash reserve requirements), placements with commercial banks only.
- Short term liabilities comprise all debt liabilities which include time deposits that may be maturing beyond three months.

### Source data
- Source data for compiling FSIs include income and expense statement, balance sheet and other call reports that are needed to compile memorandum and supervisory series for DTs, LICs and PFs.

*Source: APPENDIX D. FSI METADATA FOR DEPOSIT TAKERS*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1pngea2023003.pdf_