Mumbai: The Reserve Bank on Friday debarred all commercial and cooperative banks from paying dividends to shareholders and promoter groups as the regulator fears the Covid-driven economic shocks would continue longer and may put the health of the financial system at risk.
The decision will hit the already scuppered finances of the Centre, given the massive shocks to the economy from the coronavirus-driven lockdown and the already falling growth rates which has brought down demand for loans and thus the profitability of banks which were anyways grappling with high bad loans.
"It is imperative that banks conserve capital to retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty.
"In this regard in view of the Covid-19-related economic shocks, commercial banks and cooperative banks shall not make any further dividend payouts from the profit pertaining to FY20 until further instructions," RBI Governor Shaktikanta Das said while announcing a slew of liquidity enhancing measures to prop up the economy.
"This restriction shall be reviewed on the basis of the financial position of banks as of the September 2020 quarter," he added.
Avnish Jain of Canara Robeco AMC said "stopping dividend payments from banks would be impact government's non-tax revenue, further worsening the already stressed fiscal situation."
While most private sector banks pay only very low dividends, state-run banks have to make hefty payouts to the government annually. In fact, since 2018 the government has made it mandatory for all its profit making companies to pay at least 20 percent of their net income as dividend.
Budget 2020 has shifted the dividend distribution tax from the hands of the company to the shareholder/investor, thus appeasing the promoters.
The Covid-19 pandemic has wreaked havoc on economies across the world and has taken the lives of over 1.45 lakh globally, including around 440 in India. The virus that began in mid-November 2019 in China has infected over 2.1 million globally including around 13,387 in the country.