Key Takeaways
- Government borrowing from banks increased to Rs5.9 trillion in FY26.
- Private sector received only Rs1.4 trillion compared to government's Rs5.9 trillion borrowing.
- Limited lending opportunities keep banking sector lucrative despite economic challenges.
The banking sector in Pakistan is expected to remain heavily reliant on government borrowing for its profits, according to financial industry sources. This dependency stems from limited private-sector lending options and the focus of policymakers on external fronts.
In fiscal year 2026 (FY26), federal government borrowing from banks surged to Rs5.9 trillion, up from Rs5.4 trillion in FY25, highlighting a significant increase in reliance on bank credit for government operations.
Despite efforts by the State Bank and the government to boost lending to the private sector, particularly small and medium enterprises (SMEs), the private sector received only around Rs1.4 trillion during FY26. This stark contrast underscores the limited availability of credit to the private sector.
Financial experts point out that the declining advance-to-deposit ratio, which fell to 35.2% in June 2026 from 38.1% in June 2025, reflects weak growth in the private sector. This trend is among the lowest in the region and contributes to rising domestic debt, with interest payments consuming around Rs8 trillion.
Bankers predict that nothing will change in FY27 as there are no expected sharp recoveries in the manufacturing or export sectors. S.S. Iqbal, a money market expert, notes that if domestic investment is the lowest in the region, it indicates little need for bank credit from the private sector.
The investment-to-deposit ratio stood at 104.2% in June 2026, indicating continued dependence on government securities. Banks remain eager to invest almost all their funds in government papers, with a ratio of even higher at 106% last year.
With growing uncertainties due to the ongoing five-month-long war, domestic investors are less likely to take risks and borrow high-cost money from banks. This further reinforces the dependency on government borrowing for bank profits.
The options are limited for lending to the private sector and the situation will remain the same this year as witnessed in FY26.
A senior banker, Senior banker
If investment opportunities appear in the private sector, the situation could change, but policymakers are focusing only on external fronts while relying heavily on banks’ money for rising domestic spending. Their budget always leaves a fiscal gap to be filled by borrowed money or new taxes.
A senior banker, Senior banker
