KARACHI: The financial sector will soon have a bankruptcy law, a deposit insurance scheme and revamping of recovery mechanism with improved banking courts.

The papers that are the part of an agreement with the International Monetary Fund revealed that the SBP is preparing to introduce an explicit Deposit Protection Fund (DPF).

Deposit protection is currently ambiguous in Pakistan, as under the Banks (Nationalisation) Act of 1974, the Government of Pakistan implicitly guaranteed the safety of all deposits, despite the fact that the Banks Act applies only to nationalised banks.

The depositors widely anticipate that the government or the SBP would compensate their deposits in case of a bank failure.

Banks also support the introduction of the DPF.

As the draft DPF Act is being finalized, the paper stressed the need to ensure that necessary preconditions are in place before launching the DPF, such as achieving compliance of all banks with minimum capital requirement, appropriate regulation and effective supervision for a sound banking system and a special resolution regime.

Several small and medium sized banks in Pakistan are operating without fulfillment of minimum capital required set by the State Bank.

The paper further stated that in revamping the recovery mechanisms, consultations on the new bankruptcy law (Corporate Rehabilitation Act) are ongoing with key stakeholders.

The new law would facilitate the legal framework for rehabilitating viable corporate and financial entities speeding up the process of liquidation of unviable entities.

The ministry of finance, along with the SBP and SECP, will approach key stakeholders to address concerns regarding creditor and debtor protection. The draft law is expected to be finalised by the end of September 2014 and enacted by the end of December 2015, said the agreement paper.

To strengthen the long-term stability of the banking system, the Ministry of Finance, in consultations with the SBP, plans to introduce a deposit insurance scheme, it said.

The proposed initial coverage limit is Rs100,000 per depositor per bank, covering 72 per cent of depositors and 40pc of total insurable deposits.

The deposit insurance scheme will be managed by a Deposit Protection Fund, established as a subsidiary of SBP, with its own governance structure and funded by flat premium payments from banks.

The draft act for the Fund is being finalised and is expected to be enacted by the end of September 2014 (structural benchmark) and the scheme would commence operations by the end of December 2015.

Due to non-existence of a bankruptcy law in Pakistan and a large volume of NPLs (non-performing loans), staff underscored the need to complete the consultation with key stakeholders to finalise draft Corporate Rehabilitation Act (CRA).

Banking courts are understaffed, with years of long litigation and resolution process as well as weak enforcement capacity of courts’ decisions.

This is not a conducive environment for banks to extend credit to the eligible borrowers.

There is a need to revamp the recovery mechanisms by speeding up judicial process and filling up vacancies in banking courts with the necessary skills to handle outstanding cases, said the paper.