Ban on dividend payout will help conserve capital, no adverse effect seen

Mumbai: India’s banks have been barred from paying dividends for the fiscal year ended March 2020 so that they conserve capital in view of the economic shock caused by the Covid 19 outbreak.

In his address which included other policy measures Reserve Bank of India (RBI) governor Shaktikanta Das said the ban in dividend payment will help banks conserve capital.

“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,” Das said.

This restriction will be reviewed on the basis of the financial position of banks for the quarter ending September 30, 2020, Das said.

Analysts said the RBI move was a prudential and temporary one.

“It will help banks converse capital. Anyway private sector banks were the only ones in position to pay dividend. Banks also does not offer a high dividend yield compared to other sectors like FMGC, IT or pharma so in that sense it will not impact investors much,” said Rohan Mandora, analyst at Equirus Securities.

In the last fiscal ended March 2019 private sector banks paid a total of Rs 7087 crore in dividend led HDFC Bank’s Rs 4085 crore payment tos hareholders. Public sector banks did not pay any dividend last fiscal.

On Friday, bank stocks rose after the RBI announced additional liquidity measures that would push credit growth. The 12 share Nifty Bank index was up 3% at 2:10 pm led by ICICI Bank, Axis Bank and IDFC First Bank which were all up 5% or more.

“Restrictions in dividend payments will help in conserving capital but not to a large extent. This is also a temporary move. The real problems in the sector are to do with asset quality and liquidity due to Covid 19. Banks are also desperately seeking to revive credit demand and use the excess liquidity lying with them,” said Mahantesh Sabarad, head retail research at SBI Cap Securities.

Analysts do not expect any re-rating on the bank stocks due to this move by RBI.