By Farooq Awan

Pakistan’s banking sector increased its holdings of government securities in 2025, raising their share in total assets to around 62%, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report indicates that banks shifted their asset composition toward sovereign instruments as lending activity moderated during the year. This adjustment was influenced by policy measures implemented earlier, including the advances-to-deposit ratio-linked taxation framework, which had encouraged higher lending in the previous period and created a high base effect for advances in 2025.

As a result, advances declined by around 6% during the year, prompting banks to allocate a larger portion of their resources to government securities. These instruments are considered relatively low-risk and provide stable returns, making them an attractive option amid cautious credit expansion and evolving macroeconomic conditions.

The SBP noted that the increased investment in government securities contributed significantly to the overall growth in banking sector assets. Treasury securities alone accounted for a substantial share of the asset base, supported by their liquidity and active secondary market, which allows banks to manage short-term funding needs effectively.

The shift toward sovereign instruments also reflects banks’ risk management strategies in a stabilizing but still uncertain economic environment. By increasing exposure to low-risk assets, banks were able to maintain asset quality and protect their balance sheets from potential credit risks, particularly in a context where private sector borrowing was still recovering.

On the funding side, strong deposit growth provided banks with ample liquidity to expand their investment portfolios. Deposits increased significantly during the year, offering a stable and cost-effective source of funds that supported both investment activity and overall balance sheet expansion.

While the higher allocation to government securities has bolstered stability, the report suggests that a sustained shift away from private sector lending could have implications for credit availability and economic growth over the longer term. Encouraging a balanced allocation between lending and investment remains important for supporting productive economic activity.

The SBP also highlighted that easing monetary conditions toward the end of the year may help revive credit demand, allowing banks to gradually rebalance their portfolios. Lower policy rates are expected to improve borrowing conditions and support increased lending to businesses and households.

Despite the shift in asset composition, the banking sector maintained strong financial indicators, including adequate capital buffers, stable asset quality, and comfortable liquidity levels. These factors underscore the sector’s resilience and its ability to adapt to changing economic and policy conditions.

Credit: INP-WealthPk