Pakistani Banks Likely to Continue Relying on Government Borrowing for Profits

Pakistan's banking sector is expected to remain heavily reliant on government borrowing for profitability throughout the current fiscal year, as limited opportunities for private sector lending persist. Financial industry sources indicate that this trend, observed in FY26, will likely continue into FY27. Despite significant revenue increases over the past three years, government borrowing has also surged, with nearly half of the revenue allocated to interest payments. In FY26, federal government borrowing from banks reached Rs5.9 trillion, an increase from Rs5.4 trillion in FY25. Bankers anticipate this borrowing pattern will persist, potentially leading to even less credit availability for the private sector than in FY26. While investment opportunities in the private sector could alter this dynamic, policymakers are reportedly prioritizing external matters and utilizing bank funds for domestic spending, often creating fiscal gaps filled by borrowing or new taxes. This reliance on government securities is further evidenced by a declining advance-to-deposit ratio, which fell to 35.2% in June 2026 from 38.1% in June 2025, reflecting weak private sector growth and contributing to substantial domestic debt. Despite calls from the State Bank and government to boost private sector lending, particularly to SMEs, the private sector received only about Rs1.4 trillion in FY26, while the government borrowed Rs5.9 trillion. Experts like S.S. Iqbal, a money market expert, note that low domestic investment suggests the private sector has minimal demand for bank loans. The investment-to-deposit ratio remained high at 104.2% in June 2026, indicating banks' strong preference for government securities. Regional uncertainties, including a prolonged regional conflict, are also discouraging domestic investors from taking on high-cost borrowing from banks.