SBP Sees Higher Bank Credit Demand as Economy Recovers

The State Bank of Pakistan (SBP) expects banking sector activity to maintain steady momentum during the second half of 2026, with demand for credit likely to strengthen as inflation remains relatively contained, the currency stays stable and economic activity continues to recover.

 

The central bank, in its Mid-Year Performance Review of the Banking Sector for H1CY26, said banks could see an increase in advances during the second half of the year. A seasonal rise in borrowing and the increase in the aggregate exposure limit for large unrated private-sector borrowers from Rs3 billion to Rs10 billion are expected to support credit growth.

 

However, the SBP warned that uncertainty surrounding the Middle East conflict remains a key downside risk to the broader economic outlook and banking sector performance.

 

Government borrowing from banks is also expected to remain elevated. The government has budgeted Rs4.012 trillion in bank borrowing for FY27, significantly higher than the Rs2.231 trillion estimated for FY26.

 

During H1CY26, the banking sector’s balance sheet expanded by 9.1%, mainly due to increased investment in government securities. Advances also grew across both public- and private-sector segments.

 

The central bank noted positive developments in private-sector financing, particularly for small and medium-sized enterprises. Long-term SME financing continued to increase, while mortgage lending also gained momentum, supported largely by government-subsidised housing schemes.

 

On the funding side, banks mobilised an additional Rs3.673 trillion in deposits during the first half of the year.

 

Credit quality also improved. The ratio of non-performing loans to total loans declined to 5.5% in June 2026, compared with 6.1% at the end of December 2025. At the same time, the provisioning coverage ratio improved to 110.2% from 107.7%.

 

Despite improvements in lending and asset quality, profitability growth remained moderate. Return on Assets declined to 1.1% in June 2026 from 1.3% a year earlier, while Return on Equity fell to 19% from 21.3%.

 

The sector’s capital position remained strong, with the Capital Adequacy Ratio (CAR) at 19.6% during H1CY26.

 

The SBP’s latest stress tests also indicate that the banking sector, including systemically important banks, should remain solvent and capable of absorbing severe economic shocks over the next two years.

 

Financial market conditions were mixed during the period. Equity-market volatility increased amid geopolitical tensions in the Middle East, while foreign exchange and money markets remained comparatively stable.

 

The latest Systemic Risk Survey identified commodity-price volatility, particularly oil prices, as the leading financial stability risk, followed by global geopolitical risks. Despite these concerns, respondents remained confident in the stability of Pakistan’s financial system and the regulator’s ability to manage financial risks.

 

Looking ahead, the SBP expects banks’ earnings to remain resilient despite lower interest rates, supported by higher lending volumes to both government and private-sector borrowers. Credit risks are also expected to remain manageable as financial conditions ease, economic activity improves and borrowers’ repayment capacity strengthens.

 

Overall, the central bank expects the banking sector to maintain a strong solvency position, with stress-test results indicating continued resilience even under severe macroeconomic conditions.