ISLAMABAD – Pakistan’s banks are increasingly reluctant to lend to the private sector, and a closer look at the country’s non-performing loans (NPLs) reveals why. Despite appearing financially stable, many banks are wary of extending credit because recovering defaulted loans has become a major challenge.
Recent data shows that the banking sector’s NPL ratio has climbed to 7.4 per cent, significantly higher than global averages of 1–2 per cent. As of September, total bad loans in the country stood at nearly Rs 964 billion, with the top 13 banks alone holding Rs 622.84 billion in domestic NPLs. Leading the list is the National Bank of Pakistan (NBP) with Rs 158.3 billion, followed by United Bank Limited (UBL) at Rs 76 billion, Habib Bank Limited (HBL) at Rs 70.6 billion, Bank of Punjab at Rs 54.3 billion, and Bank Alfalah at Rs 42.4 billion.
Experts and bankers attribute this reluctance to a broken legal and recovery framework. While lending to the government is considered safe, private-sector loans are fraught with uncertainty because even clear defaults get stuck in long court battles. The Financial Institutions (Recovery of Finances) Ordinance, 2001, designed to allow banks to recover secured assets like land or equipment quickly, often fails in practice. Borrowers exploit loopholes by filing multiple cases, obtaining stay orders, or delaying proceedings, while pledged assets frequently disappear.
Even successful court decrees often remain unenforced. Police and revenue officials are hesitant to act, leaving banks with little choice but to either spend heavily pursuing defaulters or write off losses quietly. This systemic problem has far-reaching consequences: small and medium enterprises (SMEs), farmers, entrepreneurs, and ordinary consumers face limited access to credit, long-term housing finance remains scarce, and the mortgage and consumer lending markets struggle to grow.
Bankers have called on the government to implement reforms, pointing to regional examples such as Sri Lanka’s “parate execution” system, which allows quick seizure and auction of defaulted assets. Without meaningful changes, lending to the private sector is likely to remain constrained, hampering entrepreneurship, industrial growth, and broader economic recovery.
The bad loan dilemma highlights a deeper structural weakness in Pakistan’s financial system: as long as default remains cost-free and recovery mechanisms ineffective, banks will continue to avoid risky lending, leaving the private economy starved of much-needed capital.
This story has been reported by PakTribune. All rights reserved.