The banking sector is in good health. The profits may well have dipped on account of low interest rates, but the overall health has improved and the balance sheets strengthened. The financial soundness indicators released by the SBP show the banks are gradually doing more of what they are supposed to be doing, i.e. core banking activity of lending money to a borrower that is not government.

Not that the banking sector ADR has suddenly jumped to the decade old levels but there is a visible pattern. Investments continue to form the biggest chunk of the asset base, but advances are slowly but surely picking up. After almost ten year of higher year-on-year growth in investments, advances have for the first time in ten years grown at a higher rate than investments. Improved macroeconomic indicators, low interest rates, dip in yields on government papers are reasons, but the trend is encouraging.

That said, Pakistan is still far off from optimal level, as the credit to GDP ratio is less than half of what it is in India and Sri Lanka, let alone the developed world. The need for financial deepening cannot be overstressed.

The story on the liability side also shows signs of encouragement. From the looks of it, deposit growth in early double digits has continued for quite some time. But this time around, there is more depth and meaning to the deposit growth. Apart from the improvement in the overall deposit mix, which relates to cost of deposits and banks’ profitability – there is more depth in deposit growth.

The deposit to GDP growth ratio in nominal terms has improved from 33 percent in CY02 to 39 percent in CY16. It has seen a full cycle midway to the journey, when economic activities peaked around CY06-07. The GDP growth has picked up in the last two years, importantly, accompanied by low inflation, which has created more depth to the deposit growth, as the ratio has improved to the levels last seen in CY07.

While the path is right, it is a vulnerable one, as even a minor shock to either GDP or inflation could send the number packing down again. The deposit to GDP ratio in Pakistan pales in comparison to its regional counterparts. India sits at over 65 percent of deposit/GDP ratio, comfortably near double than Pakistan. The likes of Sri Lanka and Vietnam too are at least 50 percent better in this regard. So while there is money creation going around, there is significant room available for improvement.