In a significant development, the private sector in Pakistan has borrowed a record Rs1.9 trillion from banks during the first half of fiscal year 2025 (FY25). This marks a 265% increase compared to the same period last year, as per the data released by the State Bank of Pakistan (SBP).
Reasons Behind the Surge in Borrowing
The surge in borrowing is primarily attributed to a combination of factors, including a decrease in interest rates, a reduction in inflation, and the pressure on banks to meet specific targets.
| Reason for Increase in Borrowing | Description |
|---|---|
| Decline in Interest Rates | The State Bank slashed the policy rate by 900 basis points, from 22% to 13%. |
| Low Inflation | Consumer Price Index-based inflation dropped to a 7-year low of 4.1% in December 2024. |
| Bank Incentives | Banks sought to meet the 50% advance-to-deposit ratio (ADR), offering more loans. |
The Role of the State Bank Policy Rate
The reduction in the State Bank policy rate has made borrowing cheaper for the private sector. The drop from 22% to 13% in June 2024 created an opportunity for businesses to borrow at lower costs.
| Policy Rate Changes | Details |
|---|---|
| Previous Policy Rate | 22% |
| New Policy Rate | 13% |
| Impact on Borrowing | Encouraged the private sector to borrow more at cheaper rates. |
Record Borrowing in December 2024
One of the key drivers of the record borrowing was the significant increase in advances during December 2024. Banks feared the imposition of a 15% incremental tax if they failed to meet the 50% advance-to-deposit ratio (ADR).
| Month of High Borrowing | Details |
|---|---|
| Month of Record Borrowing | December 2024 |
| Reason for Surge | Fear of 15% tax if ADR target wasn’t met. |
| Amount Borrowed in December | A significant portion of the Rs1.9 trillion. |
Sector-Wise Breakdown of Lending
The data reveals that conventional banks and Islamic banks both saw substantial increases in lending. Conventional banks contributed Rs1.112 trillion, while Islamic banks provided Rs733 billion.
| Bank Type | Lending in FY25 (Rs) | Lending in FY24 (Rs) | Increase (%) |
|---|---|---|---|
| Conventional Banks | 1.112 trillion | 230 billion | +384% |
| Islamic Banks | 733 billion | 236 billion | +211% |
| Islamic Branches of Conventional Banks | 61.5 billion | 55 billion | +12% |
Loans to Non-Bank Financial Institutions (NBFIs)
Banks also provided a record Rs1.354 trillion to Non-Bank Financial Institutions (NBFIs) in the first half of FY25, significantly higher than the Rs485 billion lent in the same period last year.
| Lending to NBFIs | Amount in FY25 (Rs) | Amount in FY24 (Rs) | Increase (%) |
|---|---|---|---|
| Loans to NBFIs | 1.354 trillion | 485 billion | +179% |
Total Credit to Non-Government Sector
In total, the banks extended Rs3.212 trillion in credit to the non-government sector during the first half of FY25, a sharp increase from Rs382 billion in the same period last fiscal year.
| Total Credit to Non-Government Sector | FY25 Amount (Rs) | FY24 Amount (Rs) | Increase (%) |
|---|---|---|---|
| Total Credit Extended | 3.212 trillion | 382 billion | +742% |
Summary
The private sector record borrowing from banks signals a significant shift in Pakistan’s economic landscape. Despite the challenges posed by inflation and political uncertainty, the reduction in interest rates and the strategic incentives from banks have encouraged businesses to take advantage of cheaper financing. This surge in borrowing is expected to have a long-term impact on the economy, contributing to business growth and increased economic activity. However, the banks may face some challenges as their income could be affected by lower interest rates.
