Pakistan’s banking sector is facing a deepening crisis as bad loans rise and recovery efforts remain slow. Weak enforcement, delayed court processes, and missing collateral are limiting banks’ ability to reclaim loans.
Recent data shows that the country’s non-performing loan (NPL) ratio has climbed to 7.4 percent, significantly higher than in countries like the US or UK. The 13 largest banks in Pakistan now carry over Rs. 622 billion in bad loans, with state-owned banks facing the greatest pressure.
Recovery efforts are often stalled by stay orders, untraceable collateral, and a lack of police support for asset seizures. Even cases with court rulings can take years to enforce, creating further delays.
As a result, banks are shifting funds toward government lending, leaving credit for small and medium enterprises (SMEs), farmers, consumers, and potential homebuyers increasingly limited. Mortgage lending remains constrained because banks fear they cannot reclaim property if borrowers default.
Experts suggest that Pakistan could learn from Sri Lanka’s fast, non-judicial recovery system, which allows banks to auction collateral without lengthy court battles. Such a model could help revive lending to sectors that drive jobs and economic growth.
If Pakistan does not reform its recovery system, the credit crunch will continue. Investment will stay weak, private sector lending will shrink further, and the country’s growth prospects may remain limited.
Officials say that addressing the bad loans issue is critical for reviving Pakistan’s banking sector and restoring confidence among investors. Strengthening enforcement, improving court efficiency, and adopting faster recovery mechanisms could help banks reclaim assets more effectively and boost private sector credit.
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In conclusion, Pakistan’s rising bad loans and inefficient recovery system present a major challenge for the economy. Urgent reforms are needed to support lending, stimulate investment, and ensure sustainable economic growth.
