Pakistan’s banking industry continues to face mounting stress from bad loans, with non-performing loans (NPLs) rising to nearly Rs980 billion by the end of 2025. This has intensified concerns that structural weaknesses in the loan recovery framework and weak enforcement mechanisms are obstructing NPL resolution and discouraging credit expansion to underserved sectors such as agriculture, housing and small and medium enterprises (SMEs).
State Bank data shows commercial banks account for the overwhelming share of bad loans, with NPLs reaching Rs943bn, while specialised banks contributed Rs21bn and Development Finance Institutions another Rs16bn. Although the overall infection ratio improved to 6.1 per cent from 6.6pc because of higher lending growth, the total stock of bad loans still increased from Rs947.8bn in September to Rs964bn in December.
Bankers and legal experts argue that the steady accumulation of bad loans reflects deep flaws in the recovery and foreclosure regime under the Financial Institutions (Recovery of Finances) Ordinance, 2001 (FIRO). Lengthy execution proceedings, repeated injunctions, weak judicial enforcement and procedural loopholes often delay recoveries for years.
“Weak enforcement, legal loopholes and slow judicial proceedings collectively make loan recovery extremely difficult,” said a senior bank executive. “Banks know that if a loan turns bad, they may remain trapped in litigation for years.”
Banks argued that the principal weakness lies not in the law itself but in poor execution and weak judicial enforcement
Although the recovery law contains safeguards for speedy recovery, including mandatory deposits before stay orders, 90-day disposal timelines and automatic expiry of interim relief, courts often fail to enforce these provisions strictly.
Defaulters frequently obtain stays without depositing liabilities, cases suffer repeated adjournments, and frivolous litigation rarely attracts meaningful penalties. Execution proceedings remain tied to ordinary civil procedure under Order XXI of the Civil Procedure Code, enabling judgment debtors to prolong recoveries beyond the original litigation period through serial objections and delaying tactics.
The rapid rise in NPLs is also emerging as a broader macroeconomic threat amid slowing industrial activity, elevated interest rates, inflation and exchange rate pressures worsened by regional geopolitical instability. As repayment capacity weakens across businesses and households, banks are becoming increasingly risk-averse, restricting fresh lending to productive sectors.
The consequences extend far beyond the financial sector. SMEs and farmers face growing difficulty in accessing credit, while industrial expansion, investment and job creation continue to weaken, dragging down overall GDP growth.
The mortgage market remains particularly underdeveloped because banks lack confidence that mortgaged…
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