Banks Prioritize Government Securities as Deposits and Investments Rise

September 14, 2025 (MLN): The banking sector in Pakistan demonstrated continued expansion in August 2025, with scheduled banks recording a notable increase in total deposits and a stable trend in advances.

The latest provisional data from the State Bank of Pakistan (SBP) provides a snapshot of the sector's key metrics.

Deposits and Advances Show Growth, but with Mixed Monthly Trends

Total deposits held by scheduled banks saw a significant year-on-year (YoY) increase, rising by 11.99% to Rs. 34.46 trillion in August 2025, up from Rs. 30.77 trillion in August 2024. This robust growth in deposits reflects the ongoing financialization of the economy, a trend that is being accelerated by the government's sustained efforts to document and digitize economic activity. On a monthly basis, deposits experienced a modest rise of 0.55% from Rs. 34.28 trillion in July 2025.

Similarly, total advances grew by 11.81% YoY to Rs. 13.2 trillion, compared to Rs. 11.8 trillion a year ago. This expansion suggests that banks are continuing to extend credit to the private sector, supporting economic activity. However, on a month-on-month (MoM) basis, advances registered a slight contraction of 0.52% from Rs. 13.27 trillion in July 2025.

Key Ratios Point to a Banks preference for Government Securities

The Advances-to-Deposit Ratio (ADR), a crucial indicator of a bank's lending activity relative to its deposit base, stood at 38.31% in August. This ratio reflects a decrease of 41 basis points (bps) MoM and 5 bps YoY. The slight downward trend in ADR, particularly the month-on-month drop, indicates that deposit growth outpaced the increase in lending. This could signal a more cautious lending approach by banks or a preference to hold more liquid assets.

Conversely, the sector’s Investments have seen a notable shift. Total investments of scheduled banks reached Rs. 36.28 trillion in August 2025, representing a marginal MoM increase of 0.27% from Rs. 36.19 trillion in July. However, on a YoY basis, investments surged by a substantial 16.94% from Rs. 31.03 trillion a year ago. This significant growth is a clear indicator that banks are increasingly channeling their funds into government securities and other low-risk, high-yield investment avenues rather than extending credit to the private sector.

This shift is further corroborated by the Investment-to-Deposit Ratio (IDR), which rose by 445 bps YoY to 105.28%. The fact that the IDR is well over 100% highlights a significant trend: scheduled banks are investing more funds than they hold in deposits. This is possible by using funds raised through other sources, such as borrowings from the central bank. The rise in IDR, coupled with the decline in ADR, underscores a preference for sovereign risk over private sector risk, a common trend in times of macroeconomic uncertainty or high policy rates.

Conclusion: A Reinforced Preference amidst Economic Headwinds

The data for August 2025 reveals a banking sector that's growing its balance sheet, but with a pronounced and persistent preference for sovereign lending. This trend is further cemented by the wider economic landscape. With the government acting as the largest borrower and inflation ticking up, the State Bank of Pakistan (SBP) is expected to maintain its current policy rate. The SBP's decision is likely influenced by the need to assess the full economic impact of the recent floods, which is expected to put further upward pressure on inflation by disrupting supply chains, particularly in the agricultural sector.

Therefore, the declining ADR and rising IDR for scheduled banks are not merely a strategic pivot but a reinforced pattern driven by the convergence of fiscal and monetary realities. Banks are likely to continue channeling funds into low-risk government securities, as they offer a safe and attractive yield compared to the higher credit risk and uncertain returns of lending to the private sector in a climate of economic instability and high inflation. This dynamic will continue to affect the availability and cost of financing for private businesses, potentially constraining broader economic recovery.

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