The State Bank of Pakistan (SBP) has released its Mid-Year Performance Review of the Banking Sector for the period January to June 2024, providing a detailed snapshot of trends shaping the financial system. The report underlines both the resilience and vulnerabilities of the sector, with particular concerns about the dominance of government borrowing and persistent weakness in private sector credit demand.
According to the review, the overall asset base of banks expanded by 11 percent in the first quarter of 2025, largely driven by an increase in investments. However, lending activity contracted during the same period, a shift attributed to seasonal factors, the reversal of year-end lending spikes from 2024, and an improvement in macro-financial stability. Importantly, the pace of asset growth was lower than the 14 percent increase recorded in the comparable period of 2024.
A closer look at the investment surge shows that much of it was concentrated in federal government securities, alongside public sector advances. While this bolstered the balance sheets of banks, it also reflected the state’s continued reliance on commercial banks to bridge fiscal deficits. Meanwhile, private sector advances posted only contained growth. Consumer financing fell sharply, with a net retirement of Rs 15.8 billion, largely due to declining auto loans. In contrast, agriculture saw fresh advances of Rs 25.4 billion, supported by schemes such as the Farm Mechanisation Programme and the Prime Minister’s Youth Business & Agriculture Loan Scheme. Commodity financing also increased by Rs 30.5 billion, primarily linked to sugarcane.
Despite these developments, Pakistan has committed to the International Monetary Fund (IMF) under its ongoing programme to phase out such subsidized loan schemes, as they have historically failed to deliver sustained productivity gains.
On the deposit side, growth stood at 11.7 percent, easing banks’ dependence on borrowings but falling short of the 14.2 percent growth recorded a year earlier. Notably, borrowing from other financial institutions still rose by 13.1 percent in the first half of 2024. The advances-to-deposit ratio continued to decline, reflecting subdued private sector credit demand amid weak economic conditions, coupled with persistent government appetite for bank financing.
Bank profitability showed signs of slowing, driven by subdued loan growth and lower returns on earning assets as market interest rates adjusted to declining inflation. Despite this, the solvency profile remained solid, with the Capital Adequacy Ratio standing at 21.4 percent at the end of June 2025, comfortably above the regulatory minimum of 11.5 percent.
The SBP’s Systemic Risk Survey, conducted in June 2024, revealed that geopolitical developments ranked as the most significant risk perceived by independent respondents. Another key concern flagged in the report was the rise in non-performing loans within the energy sector, concentrated in a handful of troubled borrowers. With the government approving the procurement of Rs 1.225 trillion to retire circular debt, sectoral risks are likely to persist despite expectations of reduced tariffs from lower interest rates. The IMF has already expressed concerns about energy reforms, particularly the removal of the 10 percent cap on the Debt Service Surcharge to ensure cost recovery.
The report underscores that while the banking sector remains broadly stable, its performance is closely tied to government financing needs and a struggling energy sector. With profitability under pressure and private sector credit demand subdued, the long-term sustainability of the sector will depend on reforms that rebalance its exposure and strengthen its role in supporting real economic activity.
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