Reserve Bank of India imposed complete restrictions on dividend payment by bank for FY 2019-20 - A reasonable dividend should be allowed out of current profits and / or reserves to maintain continuity of dividend and to support people who are dependent on earning by way of dividends.

[DEV KUMAR KOTHARI]

 References:

Circulars issued by RBI to all Commercial Banks and All Cooperative Banks from time to time on issue of payment of dividend. Some recent and most relevant circulars are as follows:

RBI/2020-21/75
DOR.BP.BC.No.29/21.02.067/2020-21  December 4, 2020

RBI/2019-20/218
DOR.BP.BC.No.64/21.02.067/2019-20  April 17, 2020

RBI/2004-05/451
DBOD.NO.BP.BC. 88 / 21.02.067 / 2004-05 May 04, 2005

RBI/2004/176
DBOD.NO.BP.BC.80/ 21.02.067/2003-04 April 23, 2004 to All Scheduled commercial banks

As per these circulars in  2005 policy  decision was taken and policy was framed to allow payment of dividend by banks only out of current profits and within certain ranges of playout ratio. The range of dividend pay out and dividend rate was linked with other important performance and financial status of banks. In this formulation various factors were included  as mentioned in Matrix of Criteria for maximum permissible range of pay-out ratio prescribed in the Circular dated May 4, 2005.

Those criteria included  inter alia profitability ratios  net NPA ratio, CRAR etc. Based on formulae provided a range including  minimum and  maximum rate is to be worked out for each bank. Minimum rate was a part of range and it is not compulsory that bank should declare that much dividend. It depended on decision of the Board of Directors who recommend dividend.

 It was also stated that The Reserve Bank will not entertain any application for a higher dividend payout ratio than the one for which the banks qualify.

Covid and review of policy:

Vide Circular dated  April 17,2020 in view of  heightened uncertainty caused by COVID-19,  emphasis was laid on  importance to  conserve capital to retain  capacity  of banks to support the economy and absorb losses.  And therefore  it was  decided that all banks shall not make any further dividend payouts from the profits pertaining to the financial year ended March 31, 2020 until further instructions.

It was also stated that this restriction shall be reassessed by the Reserve Bank based on the financial results of banks for the quarter ending September 30, 2020.

Now by latest circular dated 4^th December, 2020   it has been decided that banks shall not make any dividend payment on equity shares from the profits pertaining to the financial year ended March 31, 2020. Reasons given are: 

1.  ongoing stress and heightened uncertainty on account of COVID-19,
2.  Banks to continue to conserve capital to support the economy and absorb losses.
3. further strengthen the banks’ balance sheets,
4. support lending to the real economy, etc.

Regular dividend and market capitalisation:

Regular dividend pay-out is one of important factor in deciding investment in shares of any company including banks. Market price of share determine market capitalisation of any company and its worth.

 Banks are also very much influenced by politically motivate decisions of governments. In times of Covid, banks have been and  are also likely to be effected by such political decisions. Some of them will benefit banks and some may adversely affect.

In such circumstances which EPS of banks is likely to decline, a nil pay-out will adversely affect market capitalisation of banks.

Therefore, a complete ban on dividend for FY 2019-20 must be avoided. In fact for some pay out some relaxations can be allowed to banks.

No dividend means share become non performing investment ( NPI)

As in case of banks , non-performing assets (NPA)  is an important factor, similarly  in case of investors / shareholders of banks   non performing investments is adversely affecting their earnings and market capitalisation. This also need to be avoided.

Average of minimum and maximum permissible dividend should be allowed

We can understand the reason and logic for restriction on pay out by banks. However, complete ban on dividend payment is also not justified.

Shareholders are also dependent on income. Dividend is also a source of living including for bread and butter and medicines  for many retired and very senior citizens who are unable to work and are also not getting any pension.

No dividend can lead to fall in market price of shares considerably. That also goes to make investors poorer.

Therefore complete ban on dividend is not justified. Such decisions can cause apprehension that  health of  banks is deteriorating.

RBI should reconsider the decision and can allow banks to pay at least modest dividend up to say average of minimum and maximum dividend which bank can pay by way of  dividend as per policy decision of 2005.

In fact, in such time, there should also be permission to pay some dividend out of reserves. This is because we all save money and capital for bad days. Profits are retained for future requirements. A payment to stake holder should also be considered a necessary cash out flow for maintaining confidence of stake holders and goodwill of companies including banking companies.