Pay dividends with prudence: Nabard

Based on a review of practices followed by the state Co-operative Bank (SCB) and the district central co-operative banks (DCCBs) in declaring dividends, the National Bank for Agriculture and Rural Development (Nabard)has issued several guidelines to the banks.

The step is being viewed as one to strengthen these banks and prevent them from declaring dividends without actually considering the overall financial strength of the district level banks.

The circular, which has been forwarded by the state registrar of co-operatives to the Gujarat State Co-operative Bank (GSCB)and all district central co-operative banks, said despite being pointed out earlier, many banks continue to take unrealised interest in the income head of profit and loss account without making provision for an equivalent amount, thus leading to incorrect profit figures.

The study carried out by the department of supervision of Nabard has also found instances where banks had left a huge shortfall in provisioning against their impaired assets, and have declared a profit or dividend, which is in violation of the Reserve bank of India (RBI) norms.

Listing down the eligibility criteria for SCB and DCCBs to declare dividend, the Nabard circular said banks with accumulated losses must not declare dividend from current profit and that dividends must be declared from net profits only.

The circular also said banks must comply with statutory requirements relating to cash reserve and statutory liquidity ratio. It has also said the dividend payout ratio (a percentage of dividend payable in the year to the net profit during the year) must not exceed 20 per cent.

Those in the co-operative banking industry said such guidelines will actually hamper the growth of the district central co-operative banks, which have a lot of liquidity and will also affect credit flow to hundreds of co-operatives which take loans from DCCBs.

There is one DCCB in each of the 25 districts of Gujarat. Sources said while the intention is to strengthen the DCCBs, it will directly affect credit flow into co-operative societies across the state.

Jairambhai Patel, chairman of the Gujarat State Co-operative Bank, however, felt that these directions are constructive in nature and will not affect the volume of loans that the DCCBs lend to hundreds of co-operative societies in the state.

Patel said these directions are basically in the form of an advice, asking district co-operative to maintain prudence while declaring dividends.

"Nabard has asked us to implement the directives to the extent that is possible. In either case, there have been a number of DCCbs which are not declaring dividends," Patel said.

Patel said while DCCBs of Vadodara, Kutch and Bharuch were not paying dividends, genuine profit-making DCCBs like the ones in Surat, Rajkot and Banaskantha were declaring dividends.