Pakistan’s banking sector saw a contraction in lending to the private sector during the first half of 2025, as advances fell by over 15%. This sharp decline led to the lowest Advances-to-Deposit Ratio (ADR) in more than a decade, raising concerns about weakening credit for businesses, according to the State Bank of Pakistan’s (SBP) mid-year review.
In the first half of 2025, advances contracted by 16.4%, pushing the ADR down to 35.3%, the lowest level since June 2014. While deposits increased by 17.7%, asset growth was largely driven by investments in government securities, signaling a shift toward low-risk investments and the crowding out of private credit.
This reduction in credit availability reflects weak demand for loans and a cautious approach by banks, which are increasingly prioritizing government securities over extending credit to key industries. The drop in the ADR has raised concerns about the slowing pace of investment, industrial activity, and job creation.
The contraction in private sector lending also contributed to a rise in the gross non-performing loans (NPL) ratio, which increased to 7.4% by June 2025 from 6.3% at the end of 2024, despite a decline in the actual stock of bad loans. Although provisioning levels improved, the uptick in NPLs highlights vulnerabilities in credit growth, particularly for sectors like textiles, energy, and services.
On the earnings front, banks reported steady profitability, benefitting from lower interest expenses following recent policy rate cuts. However, fiscal pressures have led to an increased reliance on banking sector profits to meet government revenue needs, with banks paying 54.5% of their pre-tax profit in taxation, the highest share in recent years.
