Pakistan’s industrial sectors are facing a deepening crisis marked by a sharp rise in non-performing loans (NPLs), deteriorating credit quality, and widespread defaults, particularly in manufacturing and export-oriented enterprises. As of 2024, default rates, among both corporate and SME borrowers continue to climb, exposing systemic weaknesses and institutional gaps in economic governance and financial regulation.

2. The Alarming Surge in Non-Performing Loans:

In a briefing before a parliamentary panel on November 19, 2019, the State Bank of Pakistan (SBP) revealed that NPLs in the banking sector had surged by over 23% in FY 2018 – 19, from Rs. 623.4 billion to Rs. 768 billion. The energy and sugar sectors alone accounted for more than half of this increase. According to the SBP, this surge was driven by a combination of factors, including a general economic slowdown, tightened macroeconomic conditions, and strained corporate cash flows.

The situation has worsened further since 2020. A combination of deteriorating macroeconomic fundamentals, sector-specific policy failures, and arbitrary fiscal decisions has exacerbated industrial distress and deepened financial vulnerabilities. Many of these measures, rather than stabilizing the economy, have contributed directly to the erosion of Pakistan’s industrial base.

3. The Legal Vacuum – Absence of a Statutory Framework for Loan Write-Offs:

Pakistan lacks a comprehensive legal framework for the write-off of irrecoverable loans. There is no law conferring a borrower’s right to request a write-off, nor any statutory duty on banks to entertain such requests. Existing mechanisms rely primarily on SBP issued guidelines, the Contract Act, and the Financial Institutions (Recovery of Finances) Ordinance. However, these are inadequate and discretionary, offering neither predictability nor fairness.

The SBP’s BPD Circular No. 29 (dated October 15, 2002), which was scrutinized by the Supreme Court in various suo motu cases (notably the Rs. 54 billion loan write-off case), aimed to address mounting NPLs by offering write-offs to improve banks’ balance sheets. However, these guidelines were administrative in nature and lacked the force of law.

In several high-profile cases, the Supreme Court recognized arbitrary loan write-offs and called for greater accountability. Yet no statutory reform has followed. The absence of legislation allows a legal and ethical grey area where public money lent through banks is subject to discretionary settlements, often without transparent oversight.

4. Governance Failures as a Root Cause of Defaults:

The core issue, however, is not just legal, it is economic mismanagement. Most defaults in Pakistan are not willful, they result from poor governance and ill-timed policy decisions. Critical economic interventions, such as including vulnerable domestic sectors in preferential and free trade agreements without required WTO-consistent impact assessments have devastated local industries.

Energy tariffs and fuel prices have risen steeply, often without any cost-benefit analysis or sectoral impact study, rendering manufacturing non-viable. Gas and electricity-dependent industries are operating far below breakeven levels. Simultaneously, massive rupee depreciation has eroded capital and net worth by 30% – 40% for businesses with import dependencies, while illegal and under-invoiced imports remain unchecked by customs authorities, undercutting compliant domestic producers.

5. Overall Missteps Affecting the Domestic Industry:

Sr. No.MeasureImpactResult 
Sudden Rupee depreciation without stabilizing framework.Sharp currency depreciation without hedging instruments or phased policy transition leads to costlier imports of raw materials, worsening input cost pressures for industries reliant on imported inputs.Working capital gaps, margin compression, and bank defaults.
Arbitrary and retrospective taxation. 
Imposition of super tax or windfall profit taxes without prior consultation.
Withdrawal of zero-rated status (SRO 1125) for export-oriented sectors.		Disrupts cash flows, reduces profitability, and increases compliance costs.Liquidity crunch and over-leveraging lead to defaults.
Energy price volatility and cross-subsidization.Frequent increases in electricity/gas tariffs for industrial users to cross-subsidize residential sectors.
Retrospective fuel cost adjustments (FCAs).		Eroded competitiveness and increased operational costs unpredictably.
Squeezed margins and inability to service debt.
Ad-hoc Import restrictions.Import restrictions (SBP’s import payment approval regime in 2022).
Delays in L/C approvals for critical machinery or inputs.		Disrupted supply chains and halted production lines.
Missed export deadlines, contract cancellations, and revenue loss.
Interest rate hikes without credit support.Tight monetary policy during stagflation (e.g., 22% plus SBP policy rate in 2023 and 2024).Sharply raised the cost of borrowing, especially on long-term project or working capital loans.
Debt-servicing became unviable, leading to defaults.
Withdrawal or delay of export rebates and refunds.Delay in duty drawbacks.Liquidity crunch for export industries, especially SMEs.
Inability to rotate capital leads to cash-flow mismatched and forced defaults.
Over-taxation and fragmented tax policy.Excessive turnover taxes on low-margin industries.Disincentivized formalization and expansion.
Chronic under-capitalization and vulnerability to credit stress.
Absence of industrial policy or protection for nascent / infant sectors.Not benefitting from the provisions of Article XVIII of GATT 1994.
Lack of import substitution support for intermediate goods.
No incentives for R&D or technological upgrades.		Domestic industries struggled to compete with cheaper imports or more technologically advanced foreign competitors.
Reduced market share, capacity underutilization, default risk.
Unplanned minimum wage hikes.Sudden increases in minimum wage without productivity-linked policies.Raised fixed costs for labor-intensive industries.
Cost burden increased without corresponding output gains, impairing repayment ability.
Poor governance in infrastructure and utility provision.Power outages, low gas pressure, or logistics bottlenecks.Production disruptions and increased per-unit costs.
Missed delivery schedules, reduced revenue, and loan stress.
Free and preferential trade agreements without due diligence.Agreements concluded without considering the provisions of GATT, 1994.
Products produced indigenously were included in the FTAs / PTAs with consulting the industry and its needs. 		Domestic industry exposed to zero or highly reduced import duty rates forcing it below the peril point.
Post-COVID Economic Scarring

Many SMEs and even large firms took loans under SBP’s refinance schemes during COVID-19, anticipating quick recovery.Weak post-pandemic recovery, high inflation, and global shocks left them unable to meet obligations.

These macroeconomic shocks and policy missteps have led to forced defaults. Borrowers, in many cases, have repaid amounts exceeding the principal in interest payments, while their collateralized assets – whose market value far exceeds the outstanding loans – remain confiscated or risk seizure. Yet, despite these systemic causes, the legal process treats such defaulters without differentiation from willful defaulters, leading many cases to stagnate in courts or end in punitive action via NAB.

6. A Call for Legislative Action:

There is an urgent need for comprehensive legislation that provides a clear legal mechanism for the classification and resolution of irrecoverable loans. Such a law must:

  1. Establish a statutory procedure for loan restructuring and write-offs.
  1. Differentiate between willful default and default due to force majeure or policy-induced economic shocks.
  1. Include provisions for independent economic, legal, and financial analysis as part of judicial or regulatory proceedings.
  1. Mandate oversight and accountability for both borrowers and financial institutions.
  1. The proposed law should aim to protect public interest, ensure transparency, and restore industrial viability by enabling businesses to recover from unavoidable setbacks rather than be driven into liquidation or criminal prosecution.

7. Sector specific breakdown of policy failures:

As stated above Pakistan’s industrial sector, especially export-oriented industries like textiles and chemical sector, have been systematically undermined by inconsistent, poorly planned, and reactive policy decisions since 2020. Resultantly, some missteps have translated into rising costs, disrupted supply chains, reduced competitiveness, and growing financial distress, leading to a surge in non-performing loans (NPLs) and industrial bank defaults. Sector specific breakdown of policy failures textile and chemical sector is as under.

Textile Industry – Export Engine in Declined

Sr. No.MeasureResult
i.Withdrawal of regionally competitive energy tariffs. In 2023, the government rescinded the RCET policy.Caused enormously high industrial electricity tariffs to the highest in the region.
Energy cost for Pakistani textile exporters became 2-3 times that of competitors in Bangladesh and Vietnam.
Several units in Punjab and Sindh shut down, while others operated at suboptimal capacity, unable to meet export orders, increasing defaults on bank loans.
ii.Import Restrictions and LC Approvals.In 2022-2023 amid a severe foreign exchange crisis, the SBP imposed administrative restrictions on the opening of Letters of Credit (LCs).
Textile producers were unable to import critical inputs like cotton, PSF, PFY, PC, dyes, and machinery spare parts. 
iii.Arbitrarily and illegally imposed anti-dumping and regulatory duties. Import of polyester Staple fiber (PSF), polyester filament yarn (PFY) was arbitrarily subjected to illegal and uncalled for anti-dumping duties. 
Caused production disruptions, loss of foreign contracts, and working capital shortfalls.
Implications of Section 51€ of the Anti-dumping Duties Act, 2015.
iv.Refund Delays and Tax Burdens.

The withdrawal of the zero-rating regime in 2019 was compounded by massive delays in GST and Duty Drawbacks.
Liquidity was locked in with the FBR, forcing firms to borrow more for operations.
The measures increased cost of capital and rising defaults, particularly among SMEs.
v.Rising NPL and bank defaults.


By mid-2023, banking sector reports indicated textile-related NPLs were rising rapidly.
Several large units warned of insolvency, with some seeking restructuring or defaulting outright.

Chemical and Allied Industries 

Fertilizer, Plastics and Pharmaceuticals

Struggling with Energy and Policy Inconsistency

Sr. No.MeasureResult
High and unpredictable energy costs.Chemical industries such as fertilizer, plastics, and pharmaceuticals rely heavily on gas and electricity.
Cross-subsidization to residential sectors and retrospective fuel adjustments made industrial energy pricing unstable and uncompetitive.
Import bans and licensing delays.Key chemical inputs faced import bans or lengthy NOC procedures, especially under “essential goods” categorizations.
Broken production cycles, contract violations, and working capital stress.
Cross-sectoral structural and budgetary failures.Inconsistent and Retrospective Taxation.
Super tax impositions, turnover taxes, and arbitrary adjustments to withholding tax regimes created planning uncertainty.
Businesses became wary of reinvestment or expansion.
Absence of a coherent industrial policy.
No long-term strategy exists for supporting value-added manufacturing or import substitution.
Incentives are often sector-neutral and do not target high-employment or high-export potential industries.
Credit cost shock.Policy rate hikes to 22% (2023) in an attempt to curb inflation created unsustainable debt-servicing costs.
Firms borrowed at cheaper rates pre-2022 and were unable to refinance or roll over loans as costs ballooned.
Labor cost surges without productivity reform.Minimum wage hikes (often politically motivated) were implemented without training or upskilling initiatives.
Labor-intensive industries like garments and footwear saw reduced margins and employment retrenchment.

8. Recommended Force Majeure Reasons to Avoid Bank Default Liability

Sr. No.ActionRequirements
i.Macroeconomic shocks and policy missteps have led to forced defaults.Evidence based economic, financial and market analysis of governments micro and macro interventions causing missteps leading to NPLs and bank defaults.
Analysis of the overall factors given at para 4 above. 
ii.Pandemics and public health emergencies.Government-imposed lockdowns (e.g., COVID-19) causing supply chain collapse, labor shortages, or total business shutdown.
Supported by government notifications and financial loss reports.
iii.War, civil unrest or political instability. Conflict, terrorism, riots, or curfews disrupting trade or destroying business infrastructure.
Needs evidence of direct impact (e.g., location-specific losses, curtailment orders).
iv.Government actions / mis-stepping. Sudden policy bans on imports/exports or production (e.g., environmental shutdowns).
Provide government notices, legal orders, or revocation documents.
v.Supply chain disruptions or critical inputs blocked.Situations where essential raw materials or services become unavailable due to global crises.
Must show dependency on the disrupted input and lack of alternatives.
vi.Unexpected major accidents.Industrial accidents, fires, or explosions that halt operations.
Verified by incident reports, insurance claims, and financial audits.
vii.Severe currency or trade shocks.Hyperinflation or sudden currency devaluation making repayment practically impossible.
Requires macroeconomic data and central bank policy references.
viii.Important legal considerations.Contract Clause: The loan agreement must include a force majeure clause—without it, courts may not entertain such defenses.
Causation Proof: Borrower must directly link the force majeure event to inability to pay (not general financial distress).
Timely Notice: Borrower must notify the bank as soon as the event occurs, ideally in writing with supporting documents.
Mitigation: Borrower must show they took reasonable steps to mitigate losses or resume payments.
Note:Force majeure is not a blanket excuse, it’s a narrowly interpreted legal shield requiring solid economic, financial and cost analyses, documented proof that the borrower’s default was truly beyond their control and not due to poor management or financial misjudgment.

Pakistan’s banking and industrial sectors are intertwined, and both are in distress. Rising NPLs and bank defaults are not merely a financial statistic, they are symptomatic of deeper structural and governance failures. Without legislative reform and policy coherence, the cycle of defaults, asset seizures, and industrial closures will continue, weakening both investor confidence and national productivity.


A coordinated, economic, financial and legally grounded response is required, one that recognizes the economic realities of borrowers, ensures institutional accountability, and restores the financial health of the country’s banking sector.

  • The writer is former Chairman 
  • National Tariff Commission 
  • Ex-Consultant the World Bank
  • Ex-Domestic Commerce Advisor M/o Commerce
  • Ex-Economic Consultant NAB  
  • He can be reached at
  • abbasraza55@gmail.com
  • www.linkedin.com/in/abbasrazaofficial