Private Sector Lending Drops 79% in H1-FY26 Despite Rate Cuts

Data released by the State Bank of Pakistan (SBP) reveals a sharp 79% contraction in commercial bank lending to the private sector during the first half of FY26 (July–December 2025), with net disbursements amounting to only Rs395 billion compared to Rs1.871 trillion in the corresponding period of the preceding fiscal year. This marked slowdown persists notwithstanding successive policy rate reductions and emerging indicators of macroeconomic stabilisation and recovery.

In contrast, the federal government continued to absorb substantial liquidity from the banking system, securing net borrowing of Rs1.512 trillion from commercial banks in H1-FY26, reversing the previous year’s net retirement of Rs1.09 trillion during the same timeframe.

According to the Pakistan Banks’ Association (PBA), overall banking sector intermediation has shown resilience and gradual improvement, evidenced by the advance-to-deposit ratio (ADR) rising to approximately 38% as of November 2025. The PBA attributes this uptick to an aggregate injection of around Rs1.5 trillion into private sector credit over the current fiscal year, as banks increasingly channel excess liquidity towards productive lending—particularly as reliance on government borrowing has moderated. The association underscored the banking industry’s pivotal role in underpinning industrial production, employment generation, and broader economic activity.

The SBP’s December 2025 monetary policy review noted a cumulative expansion of Rs187 billion in private sector credit from July to November FY26, supported by progressively easing monetary conditions, strengthened consumer and business confidence, and a more stable macroeconomic outlook. On a year-on-year basis, however, private sector credit registered a marginal decline of 0.3%, primarily reflecting a high base effect stemming from an exceptionally robust credit surge recorded in Q2 of the previous fiscal year.

In alignment with these positive developments, the SBP announced a further 50 basis points reduction in the policy rate to 10.5% in December 2025. Cumulatively, since 2024, the central bank has implemented rate cuts totalling 1,150 basis points, underscoring a clear pivot towards an accommodative monetary stance designed to catalyse sustainable economic growth.