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       KARACHI: Pakistan’s banking sector has reverted to its traditional model as the advance-to-deposit ratio (ADR) dropped to 38.1pc in June 2025, down from 50pc in December 2024, reflecting a significant slowdown in lending activity.

       The surge in lending last year was driven by a government policy announced in the FY25 budget, which imposed an incremental tax of up to 15pc on banks that failed to maintain a minimum ADR of 50pc. The move was aimed at encouraging private sector credit and boosting economic growth, which had remained below desired levels.

       The policy triggered an aggressive response from banks. Some major institutions reportedly advised large depositors to withdraw funds or face penalties as banks scrambled to meet the new threshold. In a bid to comply, banks significantly increased lending to Non-Banking Financial Institutions (NBFIs), with loans reaching a record Rs1tr by December 2024 — 130pc higher than the total credit stock of NBFIs at the time.

       According to a State Bank report, this sharp increase was a strategic manoeuvre by banks to manage surplus liquidity and meet the mandatory ADR by year-end. Despite achieving the target, the government eventually withdrew the 50pc ADR condition and still imposed an additional tax on banks.

       Following the removal of the requirement, banks shifted back to risk-free avenues, primarily investing in government securities. This shift pushed the investment-to-deposit ratio (IDR) to 103pc by June 2025.

       Published in Dawn, July 16th, 2025