Banks typically expand and contract in line with the economies they serve. Pakistan, however, presents a different picture. Despite broader economic challenges, the country’s banks have performed relatively well. Yet, much of their lending is directed toward the government rather than the private sector, reflecting systemic issues in credit recovery that deter financing for businesses and individuals.
The nation’s loan recovery laws, coupled with an inefficient judicial system, often incentivize defaults rather than penalize them. Borrowers can delay repayment for years—or even decades—because litigation drags on interminably. “Weak enforcement, legal loopholes, and slow courts collectively make loan recovery extremely difficult,” explains a senior executive of a foreign bank on condition of anonymity. “Banks are reluctant to lend to the private sector where default risk is higher. They know if a loan goes bad, they could be stuck in legal limbo.”
Public-sector banks, backed by government guarantees, can absorb losses more easily than private banks. This cautious approach limits financing for SMEs, farmers, and other private-sector borrowers who face challenges accessing capital.
The economic fallout of this weak recovery framework is significant. Pakistan’s non-performing loan (NPL) ratio currently stands at 7.4 percent, well above global and regional peers. By comparison, the US and UK maintain ratios of 1.5 percent and 1 percent, while Indonesia and Malaysia report 2.25 percent and 1.6 percent, respectively.
Data from the State Bank of Pakistan indicates that the top 13 banks hold Rs622.84 billion in domestic NPLs, contributing to an industry-wide total of Rs964 billion as of September 2025. National Bank of Pakistan tops the list with Rs158.3 billion in bad loans, followed by United Bank (Rs76 billion), Habib Bank (Rs70.6 billion), Bank of Punjab (Rs54.3 billion), and Bank Alfalah (Rs42.4 billion).
The Financial Institutions (Recovery of Finances) Ordinance, 2001, was intended to expedite loan recovery through special banking courts, but it has not achieved its objectives. While the law allows lenders to auction mortgaged assets and imposes penalties for deliberate defaults, borrowers routinely exploit procedural loopholes—obtaining stay orders, filing multiple suits, dragging out appeals, and resisting enforcement. Even when courts issue decrees, repossessing assets remains a logistical and political challenge.
Data from five leading banks reveals recovery suits worth Rs75 billion pending in high courts, with an additional Rs43 billion under execution. This excludes litigation in banking courts or ongoing appeals, highlighting the extensive legal bottleneck.
Experts point to Sri Lanka’s Parade Execution mechanism as a successful model for reform. In Sri Lanka, banks can seize and auction assets without first going to court, completing recovery within weeks. This system has revitalized credit markets and encouraged lending to SMEs and consumers.
Ultimately, Pakistan’s weak loan recovery system leaves much of the private economy underserved. Banks retreat to lending to the government or large corporations, leaving SMEs, farmers, and consumers with limited access to finance. Without effective reforms, the broader economy remains constrained, and credit growth in private sectors will continue to lag behind its potential.
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