BB finally orders banks to suspend dividends to prime the pump

In 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 their 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 against the ongoing recession as it will inject about Tk 3,000 crore in capital into banks’ balance sheet, bankers said.

Banks, which are unable to keep the required provisioning against their loans, will not be allowed to declare last year’s dividend, according to the Bangladesh Bank notice.

Beyond September, the BB has set four criteria for banks to offer 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 per cent dividend.

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

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

If any bank facing provision shortfall intends to declare a dividend, it will have to ensure the required provisioning to do so.

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

Banks whose CAR is between 10 per cent and less than 11.25 per cent can offer 5 per cent stock dividend. And they also will have to maintain the required provisioning after the existing shortfall.

If any lender’s CAR is less than 10 per cent, it cannot be offered any dividend.

Besides, all banks will have to maintain the required capital conservation buffer (CCB) along with the existing CAR as per the Basel III guidelines to declare the capital.

Lenders will have to keep 2.5 per cent CCB including 12.50 CAR.

Banks that have already declared their dividends have been asked to follow the instruction.

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

“Banks usually do not offer only stock dividend without declaring cash. They can do so after September,” he added.

Lenders and non-bank financial institutions will be able to set aside nearly Tk 3,000 crore as they are now allowed not 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 as well.

Several central banks around the world including the European Central Bank, the Bank of England and the Reserve Bank of India have instructed their banks not to offer last year’s dividend such that they can prime the pump.

Depositors are withdrawing money from banks since the last week of March when the government declared the shutdown to contain 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 will help banks to a great extent to improve their liquidity base, the central banker said.

“This decision will help banks to tackle the ongoing economic fallout,” said Md Arfan Ali, managing director of Bank Asia, adding that the lenders’ capital base will be strengthened as a result.

Pubali Bank Managing Director MA Halim Chowdhury echoed the same, saying this is a good decision beyond doubt.

“The economy is going through a tough time. The instruction will improve the financial health of banks,” he added.

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

“But postponing dividend until September might have a negative impact on the share prices.”

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

“Given the condition of the economy, the central bank step is a good measure for all, be it banks, the stock market or the investors,” said Mohammed Rahmat Pasha, chief executive officer of UCB Capital Management.

If the banks’ health becomes precarious for giving out the dividend, it will make the situation much worse for both the investors and the stock market in the days to come.

“So, this is a logical decision.”

Investors will get higher benefits in the long-run if they hold on to 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 some handsome dividends.

“If the listed banks don’t disburse cash dividend, how we will get returns from the capital market at a time when stock prices are falling?” he asked.

Another central bank official acknowledged that the stock market investors will be losers for the time being, but they will get back their returns eventually as the decision will strengthen banks’ health.

“This was a polemic, tough decision for us. We faced obstacles in taking this stance as some bank directors strictly opposed it.”

More than 50 per cent of the total dividend is usually enjoyed by the bank directors, he said.

“We hope that people’s confidence in both the central bank and the commercial banks will fortify due to the latest decision. We have taken this decision in the interest of the economy,” the BB official added.