BB finally orders banks to suspend dividends to prime the pump

12 May 2020 9:46 AM
Within an undaunted move, the central bank yesterday instructed banks to not give any cash dividend to both sponsors and investors until September to boost their capacity to absorb the strain on the capital base from the ongoing economic dire straits.

The move, which follows the lead of the central banks around the world, would help banks to fight the ongoing recession as it will inject about Tk 3,000 crore in capital into banks' balance sheet, bankers said.

Banks, which cannot keep carefully the required provisioning against their loans, will not be allowed to declare last year's dividend, in line with the Bangladesh Bank notice.

Beyond September, the BB has set four criteria for banks to provide dividends.

As per the central bank instruction, banks whose capital adequacy ratio (CAR) against their risk-weighted assets (RWA) is 12.50 and above will be permitted to give 30 % dividend.

They will have to provide 15 % stock dividend of the total volume.

Lenders, whose CAR is between 11.25 % and significantly less than 12.50 %, can provide a 15 per cent dividend, including 7.50 % stock dividend.

If any bank facing provision shortfall intends to declare a dividend, it will have to guarantee the required provisioning to take action.

Lenders which may have managed their provisioning shortfall and so are maintaining CAR of 11.25 % and above will be permitted to declare a maximum of 10 per cent dividend, including 5 % stock one.

Banks whose CAR is between 10 per cent and significantly less than 11.25 % can offer 5 % stock dividend. And they also must keep up with the required provisioning after the existing shortfall.

If any lender's CAR is significantly less than 10 %, it can't be offered any dividend.

Besides, all banks must keep up with the required capital conservation buffer (CCB) combined with the existing CAR according to the Basel III guidelines to declare the capital.

Lenders must keep 2.5 per cent CCB including 12.50 CAR.

Banks that contain already declared their dividends have already been asked to check out the instruction.

Foreign banks will not be permitted to transfer their divided to their parent companies as well, said a central bank official.

"Banks will not offer only stock dividend without declaring cash. They are able to do so after September," he added.

Lenders and non-bank finance institutions will be able to set aside practically Tk 3,000 crore because they are now allowed never to provide a dividend to their directors and shareholders.

Some 30 banks and 23 NBFIs listed with the capital market provided cash dividend amounting to Tk 1,670 crore in 2018.

There are 59 banks in Bangladesh.

The central bank will declare the same instruction for NBFIs aswell.

Several central banks all over the world including the European Central Bank, the lender of England and the Reserve Bank of India have instructed their banks never to offer last year's dividend such that they are able to prime the pump.

Depositors are withdrawing money from banks since the the other day of March when the federal government declared the shutdown to support the spread of coronavirus, leaving the lenders fending off an acute liquidity crunch.

This compelled the central bank to cut the cash reserve ratio and policy rate in two phases.

But the latest decision can help banks to an excellent extent to boost their liquidity base, the central banker said.

"This decision can help banks to tackle the ongoing financial fallout," said Md Arfan Ali, managing director of Bank Asia, adding that the lenders' capital base will be strengthened therefore.

Pubali Bank Managing Director MA Halim Chowdhury echoed the same, saying that is a good decision certainly.

"The economy is certainly going through trouble. The instruction will enhance the financial health of banks," he added.

It is a good step to strengthen the banks' capital base and also to ensure accountability, said Md Moniruzzaman, managing director of IDLC Investments.

"But postponing dividend until September may have a negative effect on the share prices."

Because the BB is allowing only the healthy banks to pay a dividend, those banks probably already have enough cash in hand to give out the dividends, Moniruzzaman added.

"Given the health of the economy, the central bank step is a great measure for all, be it banks, the currency markets or the investors," said Mohammed Rahmat Pasha, ceo of UCB Capital Management.

If the banks' health becomes precarious for offering the dividend, it will make the problem much worse for both the investors and the stock market in the times to come.

"So, that is a logical decision."

Investors will get higher benefits in the long-run if indeed they retain the stocks of the well-performing banks.

"You [the investors] have to give up something in the short-run to reap benefits in the long-run," Pasha added.

Abdul Mannan, a stock investor, however, is angry with the BB decision as he was bracing for a few handsome dividends.

"If the listed banks don't disburse cash dividend, how exactly we are certain to get returns from the administrative centre market at a time when stock prices are falling?" he asked.

Another central bank official acknowledged that the currency markets investors will be losers for the moment, but they are certain to get back their returns eventually as the decision will strengthen banks' health.

"This is a polemic, tough decision for all of us. We faced obstacles in taking this stance as some bank directors strictly opposed it."

More than 50 % of the total dividend is often enjoyed by the bank directors, he said.

"We hope that people's confidence in both central bank and the commercial banks will fortify as a result of latest decision. We have taken this decision in the interest of the economy," the BB official added.