KARACHI: The International Monetary Fund (IMF) has said delays in structural reforms — such as “resolving” the four undercapitalised banks — can hamper stability in the country’s financial sector.

The resolution of a bank means restructuring a failing lender in a situation where regulators believe there’s no prospect of its recovery.

In a detailed Staff Report prepared by an IMF team for the July 12 meeting of its Executive Board to greenlight the $3 billion Stand-By Arrangement (SBA), the Washington-based lender said the full impact of the economic downturn has yet to materialise even though the banking sector appears stable for now.

The IMF didn’t name names in the 120-page report, but analysts believe that three of the four undercapitalised banks include Silkbank Ltd and Summit Bank Ltd from the private sector and SME Bank Ltd from the public sector.

There was no consensus among analysts over the name of the last under-capitalised bank that belongs to the public sector.

“Maintaining financial stability requires close oversight and swift action to address undercapitalised financial institutions. The State Bank of Pakistan (SBP) should accelerate the recapitalisation process using its existing powers,” the IMF said.

On its part, the SBP has promised the IMF that it’ll ensure the two undercapitalised private-sector banks — presumably Silkbank and Summit Bank — enter “resolution” if they fail to get fully capitalised.

“We have delayed resolution because of ongoing talks with potential investors. We will remain closely engaged with the two undercapitalised private banks and are committed to ensuring compliance with the minimum capital requirements (MCR) at the earliest,” the IMF report quoted the Pakistani authorities as saying.

As for Summit Bank, a UAE investor became its majority shareholder in April by injecting fresh equity of Rs10bn. The injection of capital against new shares is meant to fix the bank’s capital adequacy issues.

At the end of March 2022, the bank’s paid-up capital stood at negative Rs22.6bn as opposed to the statutory requirement of Rs10bn.

With respect to Silkbank, the commercial lender has been seeking out investors for many years now, with MCB Bank being the latest institution to have initiated its due diligence.

Silkbank’s accumulated losses amounted to Rs20.2bn at the end of 2020, which is the last time the bank released its financial accounts. Its capital stood at Rs3.16bn against the prescribed MCR of Rs10bn at the end of 2020.

Speaking to Dawn on Thursday, Chase Securities Research Director Yousuf M. Farooq said depositors have no reason to worry about their funds lying with any of the undercapitalised banks given that the SBP’s track record of protecting depositors even at the cost of shareholders.

According to the IMF, the SBP has also committed to it that it’ll move ahead with resolving one public-sector bank — presumably SME Bank — after the cabinet ratified its decision to remove the institution from the privatisation list and liquidate it.

The SBP has also committed to the IMF that it’ll work with the shareholders of a mid-sized public-sector bank — which became undercapitalised during 2022-23 on account of credit and mark-to-market losses — towards making it capital-compliant by the end of September 2023.

According to one analyst, the fourth undercapitalised lender is Sindh Bank. The lender has an equity of around Rs16bn, with Rs2bn in losses on its held-to-maturity portfolio as well as Rs7.8bn in non-performing loans.

“If these losses are booked, the bank would become undercapitalised,” said the analyst while requesting anonymity.

Published in Dawn, July 21st, 2023