KARACHI: The International Monetary Fund (IMF) has welcomed the progress made by the State Bank of Pakistan (SBP) with respect to the capitalisation of the banking sector.

In the eighth review of Pakistan’s economic performance under a 36-month loan programme of about $6.6 billion, the IMF said the SBP should continue its efforts to bring a number of small banks into compliance with statutory requirements.

After the recapitalisation through a rights issue in the only capital adequacy ratio (CAR)-non-compliant bank in July, it noted with satisfaction that all Pakistani banks have now become CAR-compliant.

Expressed as a percentage of a bank’s risk-weighted credit exposures, CAR measures the soundness of a banking institution and reflects the level of protection its depositors enjoy.

However, five small banks, which have CAR of over 10% and remain compliant, are still operating below the Rs10 billion minimum paid-up capital requirement (MCR). The SBP has devised a plan to bring them into regulatory compliance by either raising equity by the end of the current year or privatising the affected public-sector banks by June 2016.

Although the IMF did not name the banks that do not meet MCR, Taurus Securities analyst Rohit Kumar says these are Bank Islami, Dubai Islamic Bank, Al Baraka Bank, Burj Bank and First Women Bank.

The IMF said the SBP should continue to engage with the MCR-non-compliant banks for early compliance with statutory requirements.

The Washington-based lender expressed its support for the on-going reforms to strengthen stability in the financial sector. It noted the regulator’s efforts to improve foreclosure and corporate restructuring legislation, which should help address the issue of non-performing loans (NPLs) in the banking system.

NPLs amounted to Rs630 billion at the end of June, up 5.8% from a year ago. The share of NPLs in loans of the banking sector at the end of the second quarter of 2015 was 12.4%.

The special mention of the foreclosure issue in the IMF document is perhaps because the highest infection ratio within the consumer sector loans is in mortgage loans. Its NPLs constituted 24.8% of the consumer-sector loans at the end of June.

The IMF also encouraged the SBP to move forward with the Deposit Protection Fund, Futures Trading Bill and Securities Act, which will constitute “significant improvements” towards strengthening the financial stability.

With regard to the draft Deposit Protection Fund Act, the IMF said it is on track for enactment by end-February 2016, which is two months late than previously envisaged partly due to a “significant legislative pipeline” within parliament.

“They are undertaking preparatory work to establish the corporate infrastructure of the Deposit Protection Fund, which is expected to become operational by March 2016,” the IMF said.