Banks Cut Private Lending, Increase Govt Exposure

Pakistan’s banking sector has scaled back its exposure to private sector lending, with advances constituting only 22% of total assets as of March 2026, reflecting a growing preference for financing government borrowing, according to a report by The Express Tribune citing data compiled by Optimus Capital Management.

The data indicates that total banking sector assets have reached approximately Rs60 trillion, while the assets-to-equity ratio has climbed to 18 times, suggesting elevated leverage primarily supported by investments in government securities.

Analysts noted that banks are increasingly allocating funds to Pakistan Investment Bonds and treasury bills, driven by lower credit risk and more favourable regulatory treatment compared to private sector lending.

They observed that constrained private credit demand has enabled banks to expand leverage to historically high levels without facing significant capital adequacy pressures. In comparison with regional markets, private sector credit in Pakistan remains relatively low, with World Bank estimates placing private credit-to-GDP ratios at around 50% in India and 40% in Bangladesh.

The shift has also influenced funding dynamics, with wholesale borrowing accounting for 27.1% of total banking assets, equivalent to over Rs16 trillion. A substantial portion of this liquidity is injected by the State Bank of Pakistan through open market operations.

This has created a cyclical structure whereby central bank liquidity is channelled to commercial banks, which subsequently invest in government debt instruments, facilitating fiscal financing while constraining credit availability for the private sector.

Analysts attributed this trend partly to restrictions on direct government borrowing from the central bank under IMF programmes, which are designed to manage inflationary pressures.

They further highlighted that limited access to credit is adversely affecting business expansion and consumer financing segments, including housing and auto loans, with private sector credit growth remaining subdued relative to overall liquidity levels.

The sector’s increasing reliance on borrowed funds and concentration in sovereign instruments may expose it to vulnerabilities in the event of tightening liquidity conditions or shifts in fiscal policy, analysts cautioned.