Addressing the law around banking

Pakistan’s banking industry continues to face mounting stress from bad loans, with non-performing loans (NPLs) rising to nearly Rs980 billion by the end of 2025. This has intensified concerns that structural weaknesses in the loan recovery framework and weak enforcement mechanisms are obstructing NPL resolution and discouraging credit expansion to underserved sectors such as agriculture, housing and small and medium enterprises (SMEs).

State Bank data shows commercial banks account for the overwhelming share of bad loans, with NPLs reaching Rs943bn, while specialised banks contributed Rs21bn and Development Finance Institutions another Rs16bn. Although the overall infection ratio improved to 6.1 per cent from 6.6pc because of higher lending growth, the total stock of bad loans still increased from Rs947.8bn in September to Rs964bn in December.

Bankers and legal experts argue that the steady accumulation of bad loans reflects deep flaws in the recovery and foreclosure regime under the Financial Institutions (Recovery of Finances) Ordinance, 2001 (FIRO). Lengthy execution proceedings, repeated injunctions, weak judicial enforcement and procedural loopholes often delay recoveries for years.

“Weak enforcement, legal loopholes and slow judicial proceedings collectively make loan recovery extremely difficult,” said a senior bank executive. “Banks know that if a loan turns bad, they may remain trapped in litigation for years.”

Banks argued that the principal weakness lies not in the law itself but in poor execution and weak judicial enforcement

Although the recovery law contains safeguards for speedy recovery, including mandatory deposits before stay orders, 90-day disposal timelines and automatic expiry of interim relief, courts often fail to enforce these provisions strictly.

Defaulters frequently obtain stays without depositing liabilities, cases suffer repeated adjournments, and frivolous litigation rarely attracts meaningful penalties. Execution proceedings remain tied to ordinary civil procedure under Order XXI of the Civil Procedure Code, enabling judgment debtors to prolong recoveries beyond the original litigation period through serial objections and delaying tactics.

The rapid rise in NPLs is also emerging as a broader macroeconomic threat amid slowing industrial activity, elevated interest rates, inflation and exchange rate pressures worsened by regional geopolitical instability. As repayment capacity weakens across businesses and households, banks are becoming increasingly risk-averse, restricting fresh lending to productive sectors.

The consequences extend far beyond the financial sector. SMEs and farmers face growing difficulty in accessing credit, while industrial expansion, investment and job creation continue to weaken, dragging down overall GDP growth.

The mortgage market remains particularly underdeveloped because banks lack confidence that mortgaged properties can be repossessed swiftly and efficiently in cases of default. Bankers argue that Pakistan’s worsening housing shortages cannot be addressed without strict and effective foreclosure laws.

Despite repeated state-backed housing finance schemes, banks remain reluctant to aggressively expand mortgage lending because defaults often trap capital in prolonged litigation. Banking experts argue that foreclosure reforms similar to Sri Lanka’s Parate Execution system are essential to restore confidence in housing finance and unlock growth in allied industries linked to construction activity.

It was against this backdrop that the Chief Justice of Pakistan convened a meeting of the Law and Justice Commission on April 30 to discuss reforms for efficient resolution of banking disputes. The meeting, attended by key stakeholders, proposed wide-ranging administrative and statutory reforms aimed at strengthening the banking recovery framework under FIRO.

Banks argued that the principal weakness lies not in the law itself but in poor execution and weak judicial enforcement. According to a Pakistan Banks Association (PBA) document presented at the meeting, banks proposed converting FIRO into a fully self-contained recovery code by removing reliance on the Code of Civil Procedure and Code of Criminal Procedure, and introducing a dedicated execution framework with mandatory timelines for attachment and auction, strict deadlines for objections and escalating penalties for frivolous delaying tactics.

Additional proposals included strict enforcement of the statutory 90-day disposal timeline, fixed deadlines for leave-to-appear applications, curbs on adjournments through heavy penalties, stricter foreclosure enforcement, mandatory hearings before grant of injunctions, police assistance for repossession of mortgaged properties, cross-bank attachment mechanisms coordinated through the State Bank and automatic attachment and sale of assets where decretal amounts remain unpaid.

Banks also sought tighter scrutiny of leave-to-defend applications, mandatory audited financial statements from corporate borrowers, recovery of legal and operational costs by successful banks, stronger powers for banking courts to resolve complex disputes, and immediate registration of First Information Reports in clear wilful default cases without prolonged Federal Investigation Agency inquiries.

Other recommendations included limiting challenges to auction sales to cases involving fraud or lack of jurisdiction, establishing dedicated High Court benches for banking matters, specialised judicial training, fixed tenures for banking court judges and regular performance monitoring of banking courts by High Courts.

Finance Minister Muhammad Aurangzeb told the meeting that the government planned to amend the banking recovery law and assured participants that the commission’s recommendations would be incorporated into future legislation aimed at strengthening banking and mortgage markets.

PBA chairman Zafar Masud highlighted concerns regarding routine grant of stay orders by banking courts without strict adherence to statutory requirements, delays in execution petitions and undue intervention by National Accountability Bureau authorities in matters related to loan write-offs despite compliance with State Bank guidelines.

The attorney general agreed with his concerns and blamed non-observance of timelines for decisions on such litigation prescribed in the FIRO, appointment of judges who lack adequate expertise in commercial and banking disputes and the premature transfers of banking court judges before they can acquire experience in dealing with such matters.

Moreover, banks opposed the proposal to establish Alternative Dispute Resolution (ADR) committees for banking disputes, arguing that the mechanism could weaken rather than strengthen recovery enforcement. According to bankers, ADR may work in cases involving genuine business distress where borrowers are willing to settle liabilities in good faith. But in cases of wilful default, they fear the mechanism would become another avenue for delaying repayments through prolonged mediation, arbitration and subsequent litigation.

Published in Dawn, The Business and Finance Weekly, May 18th, 2026