Pakistan's banking sector is bracing for another fiscal year of dependence on government borrowing, as scarce private-sector lending opportunities keep the industry profitable but deepen the country's debt spiral. With federal borrowing from banks climbing to Rs5.9 trillion in FY26 and private credit stuck at just Rs1.4 trillion, the gap between public and private lending is widening, raising concerns about long-term economic growth. Main Developments Federal government borrowing from banks reached Rs5.9 trillion in FY26, up from Rs5.4 trillion in FY25, according to financial industry sources. In contrast, the private sector received only around Rs1.4 trillion in credit during the same period. Bankers expect this trend to persist in FY27, with private-sector lending possibly shrinking further. The advance-to-deposit ratio, a key indicator of private-sector lending, fell to 35.2% in June 2026 from 38.1% a year earlier. Analysts describe this as among the lowest in the region, reflecting weak private-sector growth and a heavy reliance on government securities. The investment-to-deposit ratio stood at 104.2% in June 2026, slightly down from 106% last year, underscoring banks' preference for government papers. Read also: FBR Surpasses July Tax Goal by Rs40bn on Sales Tax Boost Background Despite a sharp revenue increase over the past three years, government borrowing has risen rapidly, consuming nearly half of revenue for interest payments. The Federal Board of Revenue achieved its revised FY26 target, yet domestic debt interest payments reached around Rs8 trillion, straining the budget. This pattern has made banks one of the most lucrative sectors for equity investors, as they profit from risk-free government securities. During FY26, the State Bank and the government repeatedly urged banks to boost lending to the private sector, especially small and medium enterprises, to help lift economic growth from below 4%. However, these calls had limited effect, as private-sector credit demand remained weak. Money market expert S.S. Iqbal notes that domestic investment is the lowest in the region, signaling that businesses require little bank financing. Why It Matters The persistent reliance on government borrowing creates a self-reinforcing cycle: high public debt drives up interest payments, which widen the fiscal deficit, leading to even more borrowing. With banks parking most of their funds in government securities, private-sector growth is starved of capital, keeping economic growth below 4%. This dynamic also exposes banks to sovereign risk, as their profitability hinges on the government's ability to service its debt. Regional uncertainties, including a five-month-long war that continues to spread, further dampen domestic investment appetite. Mr. Iqbal warns that businesses are unlikely to take on high-cost bank loans in such an environment, leaving the banking sector's fortunes tied to government borrowing for the foreseeable future. What's Next Bankers anticipate that the FY27 budget will again leave a fiscal gap to be filled by borrowed money or new taxes, perpetuating the trend. Policymakers are focusing on external fronts while relying heavily on banks for domestic spending, leaving little room for a shift toward private-sector lending. Unless investment opportunities emerge in manufacturing or exports, the banking sector's dependency on government securities is set to continue.