A banking analyst told FE: “As of now, the directive is about retaining profits, but if it is extended beyond September, there could be a stock impact.”
With a view to encourage capital conservation at a time of extreme uncertainty brought about by the COVID-19 pandemic, RBI on Friday directed banks to hold back dividends for FY20.
RBI governor Shaktikanta Das said: “It is imperative that banks conserve capital to retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty. It has, therefore, been decided that in view of the COVID-19-related economic shock, scheduled commercial banks and cooperative banks shall not make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020, until further instructions.” He added that this restriction shall be reviewed on the basis of the financial position of banks for the quarter ending September 30, 2020.
Experts said that the proposal to temporarily defer dividend payment is positive for banks’ capital positions. According to Karthik Srinivasan, senior vice president, group head – financial sector ratings, Icra, the move will boost banks’ loss-absorption capacity amid an expected increase in stress on asset quality.
“The coupon payment on the Basel-III Tier-I bonds is paid out of the profits of the bank and discretionary in nature. In our view, dividend is one of the discretionary items which is available for distribution by banks; and hence other distributions including coupons on these bonds will not be impacted,” he said.
Some banks announce dividends on a quarterly basis, while others do so annually. This latter set of lenders will now have to hold back on announcements, analysts said. Most of them are seeing the directive as a deferment of dividend, and not cancellation.
While it will be a short-term positive for banks in terms of their capital position, there could be adverse consequences for bank stocks if the new policy on dividend distribution is extended beyond September. It would effectively mean no dividends for the year. A banking analyst told FE: “As of now, the directive is about retaining profits, but if it is extended beyond September, there could be a stock impact.”
Most profitable banks in India are from the private sector and their stocks have anyway come under pressure in 2020 – falling anywhere between 28% and 69% since January 1 – as a result of selling by foreign investors.