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Official Hen Stops Giving Golden Egg: State Bank’s profit plunges sharply in FY21

From July 2020 to March 2021, the central bank has earned only 497 billion profit while in FY20, the SBP had earned 635.51 billion rupees profit during the same period.

ISLAMABAD: State Bank of Pakistan (SBP) is set to face a huge decline in its profit in the financial year 2020-21. In nine months of FY21, the central bank had already experienced 138.51 billion rupees decrease in its profit in comparison with the profit SBP earned in the corresponding period of FY20.

A further decline in SBP’s profit is being anticipated in the last quarter of FY21 (April-June 2021). From July 2020 to March 2021, the central bank has earned only 497 billion profit while in FY20, the SBP had earned 635.51 billion rupees profit during the same period. For the full financial year 2019-20, the central bank had mopped up 935 billion rupees record profit. Nevertheless, it seems to be difficult for the SBP to earn a similar profit in 2020-21 because of different reasons.  

In FY21, cut in the federal government’s borrowings from the central bank while domestic banks’ minimum borrowings from SBP amid the pandemic driven economic slowdown in the country have led to a substantial decline in income and profit of the State Bank of Pakistan in this fiscal year.

The central bank also did not earn much revenue from licensing of opening new bank branches as domestic banks resorted to downsizing/rightsizing of branches in 2019-20. Some banks operating in Pakistani initiated downsizing of bank branches before beginning of coronavirus and some paced this process up during COVID-19 because of deceleration in economic activities, rapid digitalization, online banking, and proliferation of micro-credit outlets such as EasyPaisa, JazzCash, Ucash, and Omni etc. All these factors have minimized the importance of traditional branch banking and promoted contact-less (online) banking in the country especially during the ongoing pandemic.

The federal government’s borrowings from the SBP were a major and regular source of income of the central bank. However, under the IMF programme, the federal government has reduced borrowings from the central bank and domestic banks as well in 2020-21. For example, in the July-March period of FY21, the government’s borrowings from the bank-category have dropped to 797 billion rupees, whereas in FY20, the borrowings from bank amounted to 1,940 billion rupees.

In FY20, the government’s overall borrowings amounted to 3,376 billion _ 895 billion rupees external financing and 2,480 domestic financing.

The domestic financing included 1,940 billion bank borrowing and 540 billion rupees non-bank borrowing. Furthermore, every year the domestic banks used to borrow 100s of billions of rupees from the central bank to meet growing lending demand by the private sector. Nonetheless, in the ongoing pandemic, the private sector’s demand for credit has slumped which also minimized banks’ reliance on SBP for borrowing money.

Additionally, the State Bank used to generate a significant amount of revenue every year by issuing licenses to open new bank branches and this source of income too suffered in 2020-21 as banks opted for downsizing to minimize their operational cost during the pandemic. A sharp decline in the profit of the State Bank of Pakistan in 2020-21 demonstrates the fact that the financial sector is experiencing a slump in business because of COVID-19 and other factors.

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