SBP Tightens Oversight as Banks Face Fiscal Headwinds

RNN Report

ISLAMABAD: The State Bank of Pakistan (SBP) has tightened its oversight of the banking sector, directing all institutions to prepare recovery plans in line with global standards. The plans must be tailored to each bank’s size, complexity, and risk profile, and include board‑approved contingency funding strategies to respond promptly to periods of stress.

Foreign bank branches are required to align their Pakistan operations with the recovery plans developed by their head offices. Islamic Banking Institutions (IBIs) must ensure their plans are consistent with Shariah principles, with the role of the Shariah Board clearly defined where necessary.

The SBP’s directive comes as fiscal headwinds build. Pakistan’s external borrowing climbed to a record $26.7 billion last year, with debt servicing absorbing nearly half the federal budget. The government has also tapped PKR 1.275 trillion (≈ $4.5 billion) in Islamic financing from local banks to address power sector liabilities, deepening the banking sector’s exposure to public debt.

Revenue volatility is adding further strain. Power distribution companies are facing a Rs 200 billion shortfall in FY2023‑24 as high‑use grid consumers turn to solar energy, reducing electricity‑based tax inflows and pushing fixed costs onto remaining consumers.

Meanwhile, industry groups are pressing for steep policy rate cuts—from the current 13% to single digits—arguing that high borrowing costs are stifling investment. But banks, benefiting from high yields on government securities, are wary of measures that could erode profitability.

With political uncertainty in the backdrop and fiscal pressures mounting, the SBP’s move signals a push for greater preparedness in the banking sector. The central bank has cautioned that non‑compliance with the recovery plan framework will attract strict punitive action under the Banking Companies Ordinance, 1962.