Pakistan’s banking industry is facing increasing pressure as non-performing loans (NPLs) continue to rise, intensifying concerns over the country’s legal and institutional framework for loan recovery. By the end of 2025, bad loans in the banking system had climbed to nearly Rs980 billion, raising fresh questions about whether outdated legal enforcement and lengthy court procedures are discouraging lending to critical sectors such as agriculture, housing and small and medium enterprises (SMEs).
According to data from the State Bank of Pakistan, commercial banks continue to hold the largest share of bad loans, accounting for Rs943 billion in NPLs. Specialised banks contributed another Rs21 billion, while Development Finance Institutions added Rs16 billion to the total. Although the sector’s infection ratio improved from 6.6 per cent to 6.1 per cent due to stronger lending activity, the total stock of bad loans still rose from Rs947.8 billion in September to Rs964 billion by December, indicating continued pressure on financial institutions and repayment systems.
Industry stakeholders and legal professionals argue that the growing volume of bad loans reflects structural deficiencies in the recovery framework governed by the Financial Institutions (Recovery of Finances) Ordinance, 2001 (FIRO). Banking executives say weak enforcement, legal loopholes and prolonged judicial proceedings have made the loan recovery process increasingly difficult, often trapping banks in litigation for years when borrowers default.
Despite FIRO containing provisions intended to speed up recoveries, including mandatory deposits before stay orders, fixed timelines for case disposal and automatic expiry of interim relief, enforcement remains inconsistent. Banking professionals point to repeated adjournments, delayed hearings and stay orders issued without compliance with statutory requirements as key reasons behind the slow pace of recoveries. Execution proceedings are also tied to conventional civil procedures under the Civil Procedure Code, allowing judgment debtors to delay settlements through serial objections and extended litigation tactics.
The rising burden of bad loans is also creating wider economic concerns at a time when industrial activity remains subdued and businesses continue to struggle with elevated borrowing costs, inflationary pressures and exchange rate instability. Regional geopolitical tensions have further complicated the economic environment, weakening repayment capacity among businesses and households. In response, banks have become more cautious in extending fresh financing, limiting credit access for sectors that rely heavily on formal lending to expand operations.
The consequences extend beyond the banking industry. SMEs, farmers and homebuyers are increasingly finding it difficult to secure financing as banks grow more risk-averse. Pakistan’s housing sector remains particularly affected due to weak foreclosure enforcement, with lenders expressing concerns about lengthy legal battles in repossessing mortgaged properties. Banking experts believe stronger foreclosure mechanisms, similar to regional systems such as Sri Lanka’s Parate Execution model, could improve lender confidence and help unlock growth in housing finance and related industries.
Against this backdrop, the Chief Justice of Pakistan convened a meeting of the Law and Justice Commission on April 30 to deliberate on reforms aimed at improving banking dispute resolution under FIRO. The meeting included key stakeholders from the financial and legal sectors, who proposed extensive administrative and legislative measures to improve the efficiency of banking recoveries.
Representatives from the Pakistan Banks Association (PBA) argued that the principal challenge lies not within the law itself but in weak implementation and judicial inefficiencies. The association proposed transforming FIRO into a fully self-contained recovery framework by removing reliance on the Civil Procedure Code and Criminal Procedure Code. Suggested reforms included a dedicated execution system with mandatory timelines for asset attachment and auctions, stricter deadlines for objections and financial penalties for delaying tactics.
Additional proposals presented during the discussions included stronger enforcement of the statutory 90-day case disposal requirement, tighter restrictions on adjournments, mandatory hearings before injunctions are granted and police assistance in repossessing mortgaged assets. Banks also recommended cross-bank asset attachment mechanisms coordinated through the State Bank, automatic seizure of unpaid assets and stricter evaluation of leave-to-defend applications, particularly for corporate borrowers.
Finance Minister Muhammad Aurangzeb informed participants that the government intends to amend banking recovery laws and assured stakeholders that recommendations discussed by the commission would be considered in future legislation designed to strengthen banking operations and mortgage financing.
Meanwhile, PBA Chairman Zafar Masud raised concerns over routine stay orders granted without strict legal compliance and delays in execution petitions. He also highlighted legal concerns surrounding write-offs by public sector banks and supported Alternative Dispute Resolution (ADR) only if settlements remain final and immune from further legal challenges. However, banks broadly opposed ADR committees for wilful default cases, warning that such mechanisms could unintentionally create additional delays through prolonged mediation and litigation rather than improving recovery outcomes.
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