The move by the Reserve Bank of India (RBI), asking scheduled commercial and cooperative banks to not pay further dividend for FY20 till September 30, 2020, is being seen as a pre-emptive move to protect the balance sheet of lenders.
“It is imperative that banks conserve capital to retain their capacity to support the economy, and absorb losses in an environment of heightened uncertainty,” the regulator said in a statement.
Experts say the decision is a step in the right direction, as the Covid-19 impact on asset quality is difficult to gauge. Anil Gupta, sector head (financial sector ratings), ICRA, believes the RBI wants banks to conserve capital by restricting dividend payouts, given the degree of asset quality pain banks could face is uncertain.
Though banks don’t need to consider the moratorium period while classifying accounts as bad loans, there is scepticism on slippage and overall asset quality of banks once the moratorium is lifted.
Moreover, in the past, there have been instances of divergence in classification of bad loans declared by banks, and the RBI’s assessment.
Top private banks paid Rs 6,600 crore in dividend during FY19; some have announced interim dividend for FY20 but haven’t paid them so far.
The situation is more challenging for PSBs, which have a weaker capital position and are just emerging from significant losses since the past few years.
However, even as dividend payment is being curtailed, it is unlikely to boost the capital of banks.
“Though the profit position of PSBs is expected to be marginally positive in FY20, the amount of dividend will be significantly lower than the balance sheet size or past peak dividend payments,” says Jindal Haria, director (financial institutions), India Ratings.
According to India Ratings, PSBs may report Rs 15,000-20,000 crore in net profit for FY20. In normal course, this would lead to dividend payout of up to Rs 2,000-3,000 crore. The amount is inconsequential, considering State of Bank of India’s loan book of Rs 23 trillion as of December 2019.
In FY18 and FY19, PSBs did not pay dividend amid losses/weak profits. This also raises doubts on their ability to pay dividend for FY20.
In case of private lenders, an analyst from a domestic brokerage says: “Given the dividend payment track record, the amount of capital support will not be significant.” While a few experts foresee some support for small private banks, the same remains to be seen.
On the flip side, the measure will impact investment income of companies that own significant stake in banks. For instance, HDFC receives over Rs 1,000 crore in dividend from HDFC Bank.
On Friday, the Nifty Private Bank index gained 7.4 per cent and Nifty PSU Bank index rose 2 per cent.