Credit rating agency Moody, has called the continuing appearance of Pakistan on the grey list of the Financial Action Task Force (FATF) a ‘credit negative’ for country banks.

“The announcement is credit negative for Pakistani banks because it raises questions about potential additional restrictions relating to banks’ foreign-currency clearing services, as well as their foreign operations,” said Moody’s Credit Outlook on Thursday.

“Banks’ profitability risks being constrained as a result of increased compliance and operational costs,” it said.

The intergovernmental body on Friday gave Pakistan till June 2020 to better its anti-terrorism financing steps.

“The FATF strongly urges Pakistan to swiftly complete its full action plan by June 2020,” the global body said in a statement issued at the end of the plenary meeting in Paris.

Moody said if Pakistan failed to conduct the FATF Action Plan, international financial institutions could curb their interactions with Pakistani banks and other financial firms, which also includes terminating the correspondent banking relationships.

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“This in turn would further constrain banks’ ability to generate business and result in higher compliance costs.”

The agency stressed that Pakistan’s improvement in compliance with global anti-money laundering standards and tackling terrorist financing standards, both by Pakistani banks and country’s authorities, means that banks are still at risk of losing access to foreign-currency clearing services, which is crucial for Pakistani banks as it allows them to run cross-border payments for clients.