Recovery planning: SBP unveils regulatory framework for banks
Aimed at aligning domestic practices with international standards and best practices, the framework outlines the SBP's supervisory expectations and seeks to harmonize recovery planning across the banking industry.
The basic objectives of recovery planning are to ensure that the banks are prepared for periods of financial stress, can stabilize their financial position, recover from financial losses, and avoid failure.
SBP injects record high Rs14.3trn in banks for seven days
The SBP has asked banks to develop and maintain recovery plans that include a number of recovery options, and test their plans to assess their effectiveness.
The recovery plan should include measures to reduce the risk profile of a bank and conserve capital in case of need. It should also include strategic options, such as, the divestiture of business lines and restructuring of liabilities, a circular issued by the SBP said.
In order to strengthen recovery and resolution regime in Pakistan, various amendments in relevant laws i.e. Banking Companies Ordinance (BCO), 1962 and Deposit Protection Corporation (DPC) Act, 2016 have recently been enacted.
The amendments provide explicit legal powers to State Bank to require the banks to submit a recovery plan in the form, content and manner as directed by the SBP, remove any impediments to the implementation of the plan, revise and update recovery plan etc. Accordingly, the SBP has developed a regulatory framework on recovery planning, in line with the international standards and best practices.
As per framework, the banks are required to develop and maintain comprehensive recovery plans on group wide basis including their subsidiaries and associates, where applicable.
The banks shall develop and submit their first Recovery Plans in light of this framework, duly approved by their Board of Directors to relevant Banking Supervision Departments by June 30, 2026 based on the audited financial statements as of December 31, 2025.
Subsequently, all the banks are required to submit their Board approved recovery plans to relevant Supervision Department by 30th June of each year based on the latest audited financial statements or within 15 days of the Board's approval in case of revision in the plan based on material changes during the year.
The recovery planning requirements would be applicable on banks requiring them to prepare and maintain comprehensive recovery plans on group wide basis including their subsidiaries and associates, where applicable.
The banks may adjust their recovery plans keeping in view their size, complexity of operations, and risk profile while ensuring that at a minimum, key components set out in this framework are duly covered.
The SBP has also directed the foreign bank branches to must align their recovery plans with those developed by their Head Office, ensuring consistency with the applicable provisions in this document with respect to their operations in Pakistan.
While, the Islamic Banking Institutions (IBIs) will ensure that the recovery plans are in conformity with Shariah principles, and the role of Shariah Board has been appropriately defined (if required). In this regard, the banks are now required to incorporate their contingency funding plans in the board approved recovery plans prepared under this framework to effectively deal with unusual situations in a timely and effective manner.
The SBP has warned that any violation of these instructions shall attract strict punitive action under the relevant provisions of the BCO, 1962.
Copyright Business Recorder, 2025
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