RBI bars public and cooperative banks from doling of dividends for a second time — adds to the three-year drought of payouts

• The Reserve Bank of India (RBI) has barred public and cooperative banks from paying out dividends for a second time this year.
• However, the top five public sector banks have not paid any dividends since 2017 anyway.
• RBI’s internal assessment also projects that public sector banks are likely to be the most impacted by the coronavirus pandemic resulting in a high level of bad loans.

The Reserve Bank of India (RBI) announced that public sector banks and cooperative banks would not give out dividends for the current fiscal year. This is the second year in a row that the apex bank disallowed dividends.

That said, state-run banks haven’t been paying out dividends over the last couple of years anyway. In 2018, Indian Bank and Vijaya were the only two lenders able to dole out a part of their profits to its shareholders. Most other public sector banks have been struggling to survive.

Far from the days of 2013, when SBI announced a massive dividend of ₹41.5, banks in India have been trying to stave off the huge wave of bad loans since.

It was a prudent move by RBI in March, when it barred banks from paying dividends in March 2020 to conserve capital. The central bank’s own internal assessment shows that public sector banks are the most at risk from bad loans.

This time around, the narrative remains the same. RBI justifies that these institutions need to strengthen their balance sheet while also having enough liquidity to give loans at a time when the COVID-19 pandemic is still impacting the overall economy.

“In view of the ongoing stress and the heightened uncertainty on account of COVID-19, it is imperative that banks continue to conserve capital to support the economy and absorb losses — if any,” explained RBI governor Shaktikanta Das.

The latest estimates on the extent of bad loans is expected to be released in the third week of December, after the Supreme Court verdict on the loan moratorium case. Once the verdict is delivered, the stay on declaring defaulting accounts as non-performing assets (NPAs) will be lifted.

Guidelines for dividends from NBFCs soon
Currently, there aren’t any guidelines to dictate whether or how these shadow banks are allowed to disburse their dividends. However, the increasing instances of banks failing, their interconnectedness with the rest of the financial system, and the impact of COVID-19 has forced RBI to revise its position.

“Different categories of NBFCs would be allowed to declare dividends as per a matrix of parameters, subject to a set of generic conditions,” explained Das. The RBI will be releasing a draft circular on this shortly, which will be open to the public for comments and suggestions before the final guidelines are put in place.

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