Pakistan approves industrial revival plan to tackle idle capacity and loan defaults

Pakistan has approved an industrial revival plan aimed at reactivating idle industrial assets, boosting their capacity, reducing non-performing loans ratio and burden on government-owned banks, and improving credit flow of SMEs.

A significant proportion of Pakistan's industrial capacity remains underutilized due to financial distress and prolonged loan defaults. Private banks have cleared up their balance sheets though loan settlements and haircuts but government-owned banks have been risk averse due to audit fears, lack of enabling guidelines and rigid accountabiity framework.

At the heart of the new policy is the State Bank of Pakistan’s draft Revival and Debt Resolution of Sick Industrial Units (RDRSIU) framework, which allows financial institutions, including Development Finance Institutions (DFIs) and Government-Owned Financial Institutions (GOFIs), to restructure non-performing loans (NPLs) through interest reductions, rescheduling up to 10 years, and fresh working capital worth 20% of the restructured principal. Sick units may also opt for lump-sum or staggered Fair Final Settlements (FFS).

Under the policy, only industrial borrowers categorized as “viable” or “viable with external support” will qualify for relief, while “dormant” entities with no commercial viability may face legal action or asset repossession.

To encourage investment, the policy proposes cutting corporate tax from 29% to 26% over the next three years. Borrowers availing debt settlements will be eligible for tax deductibility under Section 22 of the Income Tax Ordinance.

Reforms have also been proposed to the Corporate Rehabilitation Act 2018, SECP Act, AML Act, and tax laws to streamline the revival process.

Banks are being urged to adopt early warning systems and third-party due diligence, especially for exposures above PKR 100 million. Shadow accounting and enhanced audit tracking will ensure transparency and compliance under International Financial Reporting Standards (IFRS-9).

Under the plan, 10 new implementation sub-committees have been formed, with a one-week deadline to begin execution.

The policy will also undergo a mid-term review after 18 months and include quarterly progress reports to the Ministry of Industries, aiming to re-energize Pakistan’s manufacturing backbone and restore investor confidence through transparency and reform.