SBP Asks Banks To Develop Recovery Plans for Financial Losses and Avert Failure

The State Bank of Pakistan (SBP) has directed commercial banks to develop and maintain comprehensive, group-wide recovery plans to ensure they are prepared for financial stress, can stabilize their financial position, recover from losses, and avoid failure. These requirements apply to all banks and must cover their subsidiaries and associates, where applicable. Banks may tailor their recovery plans according to their size, operational complexity, and risk profile, but must ensure that all key components outlined in the SBP framework are included. Foreign bank branches are required to align their recovery plans with those of their head offices, ensuring consistency with SBP’s provisions for operations in Pakistan. Islamic Banking Institutions (IBIs) must ensure their recovery plans comply with Shariah principles, with a clearly defined role for the Shariah Board, if applicable. Incorporating BSD Circular No. 07 of 2003, which mandated contingency funding plans for unexpected or worst-case scenarios, the new framework now requires banks to embed these plans within their board-approved recovery plans to enhance their ability to respond effectively to crises. Recovery plans must include a range of recovery options and be regularly tested for effectiveness. They should contain measures to reduce the bank’s risk profile, conserve capital, and consider strategic options such as divesting business lines or restructuring liabilities. Banks must submit their first board-approved recovery plans under this framework to the relevant Banking Supervision Department by June 30, 2026, based on audited financial statements as of December 31, 2025. To support this initiative, recent amendments to the Banking Companies Ordinance (BCO), 1962, and the Deposit Protection Corporation (DPC) Act, 2016, have granted the SBP explicit legal powers to require, review, and revise recovery plans and to remove any impediments to their implementation. To harmonize recovery planning practices across the industry, SBP has developed this new regulatory framework in line with international standards and best practices. All banks must submit their board-approved recovery plans annually by June 30, based on the most recent audited financial statements, or within 15 days of board approval if the plan is revised due to material changes during the year. Each recovery plan must include an overview of the bank’s business model and identify core business lines critical to operations, profitability, and overall value. Banks must also detail the activities conducted by these entities both in Pakistan and abroad.