By Azam Tariq

Pakistan’s banking sector saw its non-performing loans (NPL) ratio decline to 6.1% in 2025 from 6.3% a year earlier, reflecting improved asset quality and better risk management, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report indicates that the reduction in NPLs came despite earlier economic challenges, highlighting the resilience of the banking system and the effectiveness of credit risk management practices. The improvement was supported by a relatively stable macroeconomic environment, easing inflation, and the gradual recovery in economic activity, which helped strengthen the repayment capacity of borrowers.

Provisioning coverage also improved during the year, with loan-loss reserves rising to 107.7% of non-performing loans compared to 103.9% in the previous year. This increase in coverage indicates that banks are well-positioned to absorb potential credit losses and maintain financial stability even in the face of adverse conditions.

The SBP noted that the overall credit risk in the banking sector remained contained, supported by a high proportion of creditworthy borrowers. Around 62% of corporate and commercial loans were extended to rated borrowers, which reduced the likelihood of defaults and contributed to maintaining asset quality.

In addition, banks continued to benefit from a diversified asset base, with a significant portion of their portfolios invested in low-risk government securities. This helped limit exposure to high-risk lending and supported overall balance sheet stability.

The report highlights that improved macroeconomic indicators, including lower inflation and stable exchange rate conditions, played a key role in enhancing borrowers’ repayment capacity. As financial conditions eased toward the latter part of the year, businesses and households were better able to manage their debt obligations, contributing to the decline in NPLs.

The SBP also emphasized that prudent regulatory oversight and risk management frameworks have strengthened the banking sector’s ability to monitor and manage credit risks effectively. Continued compliance with regulatory standards has helped ensure that banks maintain adequate provisions and capital buffers.

While the improvement in asset quality is encouraging, the report cautions that credit risks have not been completely eliminated. External uncertainties, including global economic volatility and geopolitical developments, could affect borrowers’ repayment capacity if they intensify.

Sustaining the improvement in asset quality will depend on continued economic stability, prudent lending practices, and effective risk management. A stable credit environment remains essential for supporting financial sector resilience and enabling banks to expand lending in a sustainable manner.

Credit: INP-WealthPk