* Financial sector resilience improved compared to the same period of 2024
* Private sector Credit-to-GDP remained below pre-crisis levels, indicating room for further expansion
* Stage 3 Loans ratio of the banking sector remained elevated despite recording a declining trend
* Profitability improved during the first half of 2025 with an increase in net interest income
The local banking sector demonstrated stronger resilience and improved performance during the first half of 2025, supported by the country's recovering macroeconomic conditions, the Central Bank said in its Financial Stability Review (FSR) 2025.
According to the review released yesterday, the resilience of the financial sector improved compared to the same period of 2024, supported by favourable developments in domestic macroeconomic conditions in the wake of heightened global uncertainty and lingering effects of the recent economic crisis.
Against the improvement in domestic macrofinancial conditions, credit granted by financial institutions, particularly to the private sector, increased during the period under review. The Central Bank said this was supported by the easing pressure on balance sheets of households and firms with the expansion in economic output and subdued price levels.
Credit granted by banks and finance companies increased, however, private sector Credit-to-GDP remained below pre-crisis levels, indicating room for further expansion, particularly given the reduced demand for credit by the public sector.
The Central Bank noted that the private sector Credit-to-GDP gap widened within the expansionary phase of the credit cycle, suggesting the need for continuous monitoring of any build-up of systemic risk.
With these developments, the financial intermediation of the banking sector, as reflected through the Credit-to-Deposit ratio, remained subdued. The Central Bank also highlighted that the tilt in exposure towards the government and public corporations continued to decline, reflecting the impact of ongoing revenue-based fiscal consolidation measures and cost-reflective pricing.
In terms of interest rate movements, although rates have been declining, the spread between lending and deposit rates remained elevated relative to pre-crisis averages, highlighting room for further improvement of the domestic interest rate structure.
The banking sector's resilience was reflected through profitability, capital adequacy, efficiency, asset quality, and resilience to market risk indicators, which together strengthened the Banking Soundness Index.
However, the Stage 3 Loans ratio of the banking sector remained elevated despite recording a declining trend. Liquidity levels of the sector, as measured in terms of the Rupee Liquidity Coverage Ratio (LCR), remained well above regulatory minimum requirements, although with a modest decline amidst continued credit expansion. A similar trend was observed in the Net Stable Funding Ratio (NSFR), indicating adequate liquidity to support continued credit growth.
Profitability improved during the first half of 2025 with an increase in net interest income, while the Total Capital Adequacy Ratio (CAR) also strengthened by end of the second quarter compared to the same period in 2024.
The Central Bank noted that as the economy progresses through the expansionary phase of the credit cycle, close monitoring and proactive measures to address potential vulnerabilities and emerging risks would be crucial in sustaining financial system stability.