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COVID-19 disaster: RBI tells banks to carry again dividends for FY20

Experts mentioned that the proposal to quickly defer dividend fee is constructive for banks’ capital positions.

With a view to encourage capital conservation at a time of maximum uncertainty caused by the COVID-19 pandemic, RBI on Friday directed banks to carry again dividends for FY20.

RBI governor Shaktikanta Das mentioned: “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 idea of the monetary place of banks for the quarter ending September 30, 2020.

Experts mentioned that the proposal to quickly defer dividend fee is constructive for banks’ capital positions. According to Karthik Srinivasan, senior vp, group head – monetary sector rankings, Icra, the transfer will increase banks’ loss-absorption capability amid an anticipated enhance in stress on asset high 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 mentioned.

Some banks announce dividends on a quarterly foundation, whereas others accomplish that yearly. This latter set of lenders will now have to carry again on bulletins, analysts mentioned. Most of them are seeing the directive as a deferment of dividend, and never cancellation.

While it will likely be a short-term constructive for banks by way of their capital place, there may very well be adversarial penalties for financial institution shares if the brand new coverage on dividend distribution is prolonged past September. It would successfully imply no dividends for the 12 months. A banking analyst informed FE: “As of now, the directive is about retaining profits, but if it is extended beyond September, there could be a stock impact.”

Most worthwhile banks in India are from the personal sector and their shares have anyway come beneath strain in 2020 – falling anyplace between 28% and 69% since January 1 – because of promoting by overseas traders.

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