Banks continue shifting funds into govt securities as private lending stays subdued

KARACHI: Pakistani banks have continued to channel a growing share of their funds into government securities while lending to the private sector remains weak, according to figures cited in reports by PwC and Arif Habib.

As per details, PwC’s 2025 report said Pakistan’s advance-to-deposit ratio (ADR) has been on a downward trend. The ADR stood at 35 per cent in June 2025 after rising from 41pc in 2023 to 49pc in 2024. The latest report available up to March 2026 showed a slight recovery to 38.8pc, but the level remained below what would be needed to support faster economic growth.

The same report said lending to the private sector fell to 11pc of GDP in 2024. At the same time, the investment-to-deposit ratio (IDR) rose sharply from 40pc in 2010 to 93pc in 2024, and reached 100pc by June 2025.

Deposits, advances and investments

Arif Habib’s latest report showed the IDR climbed further to 104.3pc in March 2026. Banking deposits rose 18.6pc year-on-year to Rs37.5 trillion as of March 31, compared to Rs31.6tr in March 2025. During the same period, advances increased 8.1pc to Rs14.6tr from Rs13.5tr.

The strongest increase was recorded in investments in government securities, which rose 20.8pc to Rs39.1tr, up from Rs32.4tr in March 2025. The data reflected a continuing pattern in which private-sector lending remained low relative to deposit growth, while a substantial portion of bank funds was placed in government papers instead of business loans.

This trend was also visible in the most recent treasury bill auction held on Wednesday, where investors, mainly banks, brought Rs3.8tr in liquidity for placement in government instruments.

Policy rate and market conditions

The 100 basis points increase in the State Bank of Pakistan’s policy rate to 11.5pc added to the attractiveness of treasury bills, with returns going as high as 12pc.

Researchers believe the large volume of liquidity has little alternative but to move into government papers because lending to the private sector has become riskier in light of recent developments in the region. The Gulf war has raised production costs and weakened the purchasing power of the public.

The report further noted that 10.9pc inflation in April and the higher cost of borrowing have reduced the likelihood of investors taking on risk. Bankers as well as people in trade and industry believe the probability of default has increased because of the cost of money.

However, borrowing for working capital was observed during FY26, though it as short-term borrowing without a long-term target.