Pakistan’s banks are being squeezed by a deepening loan recovery crisis where slow courts, weak enforcement, and growing bad loans are choking off credit to the private sector.
New analysis shows the country’s non-performing loan ratio has climbed to 7.4 percent, far higher than in the US or UK. The 13 biggest banks now carry more than Rs. 622 billion in bad loans, with state-owned lenders under the most pressure.
Recovery efforts remain stuck while stay orders drag on, collateral often can’t be traced, and police frequently decline to help with asset seizures. Even cases with clear court decisions can take years to enforce.
Banks are steadily shifting their money toward government lending. As a result, credit for SMEs, farmers, consumers, and potential homebuyers continues to shrink. Mortgage lending, already limited, remains frozen as banks fear they won’t be able to reclaim property if a borrower defaults.
Experts say Pakistan could learn from Sri Lanka’s fast non-judicial recovery model, which lets banks auction collateral without lengthy court battles. They argue such a system would quickly revive lending to sectors that drive jobs and growth.
Unless Pakistan fixes its broken recovery system, the credit crunch will worsen, investment will stay weak, and the country’s growth prospects will continue to dim.
Raise interest rates. Simple
Don’t offer loans to high and rich
Bad debts will continue to rise if you allow companies to use residential housing as collateral. It distorts prices of housing and at the same time the houses don’t sell at all of companies default
Making companies can simply ignore paying back while banks can’t sell property to get back their money. Added effect is that housing prices rise making everything unaffordable.
Dismantle this practice to use housing as collateral.
Interest rates are decided by SBP, variously people with political back ground take loan from banks and uses their political power to delay the process of refund for years.same goes for DISCO’s defaulted billionaires.common man is the person who get squeezed between both.
Sir, Pakistan’s Rs. 622 billion bad loan surge reflects a structural mismatch between traditional collateral based lending models and a recovery system that cannot enforce them.
Instead of relying on the old 5 Cs, the most effective “C” today is a data driven credit score that captures real time behaviour, transaction patterns, and willingness to repay. Islamic finance already points us toward this direction financing tied to real activity, ethical risk sharing, and fair transparent recoveries. Strengthening non judicial recovery processes is essential, but the deeper reform is modernising underwriting itself, shifting from collateral dependence to behavioural and data based assessment so defaults reduce at the source, not just at the court.
As we are building cr. scores and tech for Global FIs, available for any assistance required by FIs.
Best,
NM.