KARACHI: The government has promised the International Monetary Fund (IMF) that two banks would be placed into “resolution” by May 2023 if they did not finish the first phase of their recapitalisation plan by March of that year.

If this occurs, these banks might be next to undergo a forced restructuring or perhaps be completely sold off, similar to what happened to KASB Bank in 2015.

Although the names of the two institutions were not mentioned, it was obvious that Silkbank and Summit Bank were being discussed.

“The government will continue to closely monitor the health of our financial sector to safeguard its resilience,” according to a memorandum of economic and financial policies attached with the IMF’s country report on Pakistan published last week.

“Overall, banks remain well capitalised and profitable, with non-provisioned NPLs (non-performing loans) at 0.7 percent as of end-March 2022. However, there are pockets of vulnerability with three small banks remaining undercapitalised,” the government said in a report.

“We remain closely engaged with two undercapitalised private banks and are committed to ensuring compliance with the minimum capital requirements. Due to unanticipated delays in the process, the first-stage recapitalisation of the two private sector banks will not be completed on time,” it added.

On March 18, 2022, a public offer was made for an equity injection into one of the private banks. However, the process could not be completed by end-May because of a legal dispute.

A resolution of the legal dispute was expected shortly, which would pave the way an equity injection. This would likely result in the bank achieving positive capital by end-September 2022, meeting the first stage recapitalisation requirement. For the second private bank, the capital process was hampered, but the bank has now identified an investor and a public announcement of intention has been made for an equity injection on May 31, 2022, said the report.

“We will require that the second bank will also complete its first-stage recapitalisation, and thus the first-stage recapitalisation of both banks will be complete by end-March 2023 (end-May 2022 structural benchmark is reset to end-March 2023),” it said.

“Furthermore, we will initiate orderly resolution of either or both of these two banks by end-May 2023 should they remain undercapitalised at that point (new end-May 2023 structural benchmark).” Progress on the public sector bank undergoing privatisation remains slow and we were unable to complete the process by end-January 2022. As previously committed, the Privatization Commission Board has recommended to Cabinet Committee on Privatization to delist the bank from the privatization programme, the SBP has formally informed the federal government that the bank cannot be rehabilitated and should be resolved.

With the approval of the Ministry of Finance, the SBP would commence the resolution process for the bank. “We are advancing our efforts to strengthen our bank resolution and crisis management frameworks, including the deposit insurance scheme, and align these with international best practice,” the report said.

“To that end, we will submit a draft law, in line with IMF staff recommendations, to the Cabinet by end-October 2022, with the aim of parliamentary adoption before the end of the programme. Lastly, we will adopt by end-June 2023 a comprehensive strategy to address high levels of NPLs in some banks, including by requiring bank-specific plans to reduce them, and to write off fully provisioned NPLs (new end-June 2023 structural benchmark),” the report said.

Fahad Rauf, head of research at Ismail Iqbal Securities, said the IMF has repeatedly highlighted the need to recapitalise these banks in order to strengthen financial stability of the banking system.

“Now the IMF has asked the banks to recapitalise or face liquidation. There has been some interest from investors in these banks to inject capital. If that goes through with regulatory approvals, then banks would be able to meet IMF targets,” Rauf added.