Capital adequacy norms tying down bank payouts

Stiff prudential norms and capital requirements are likely to prevent public sector banks from increasing the dividend pay-out in accordance with the government's order this week to pay a minimum 20 per cent dividend of post-tax profits, analysts said Thursday. Dividend pay-out ratio for most PSU banks is in the 15-22 per cent range, they said.

Tuesday, the government asked all profitable state-owned companies to pay a minimum 20 per cent of their share capital or a minimum 20 per cent of post-tax profits as dividend, whichever is higher.

The government also urged profit-making PSU companies to consider issue of bonus shares. These were among measures announced to contain the government's fiscal deficit.

But analysts said banks may not have to increase the pay-out in accordance with this government order.

"(The) banking sector is likely to remain out of the purview of the new guidelines due to issues of capital adequacy, despite the fact that they are, in general, poor dividend payers and have considerable cash from treasury gains," an analyst with a foreign brokerage said.

In the last financial year that ended March, most government banks paid dividend in the range of 15-22 per cent of post-tax profits, according to analysts.

"Most banks have been paying dividends close to the 20 per cent benchmark" as set by the government, noted K. Cherian Varghese, chairman and managing director of Corporation Bank.

A higher pay-out by banks cannot be enforced without bypassing the stiff Reserve Bank of India guidelines on dividend payments.

According to these norms, banks can pay up to 33 per cent dividend without RBI's permission. The rules also bar banks with a capital adequacy ratio of less than 11 per cent and non-performing assets of more than 3 per cent of their total loan portfolio from declaring dividends.

"The RBI guidelines were to ensure there is consistency in the performance of banks. In a year where windfall profits were made from treasury gains, most of the gains could not be distributed as dividends," Varghese said.

These norms were formulated keeping in mind the capital requirements of the banks to meet the Basel II norms. Increasing dividend pay-outs to government at a time when banks such as Punjab National Bank and Bank of Baroda have already announced plans to tap the equity markets to raise additional capital would make little sense.

"The RBI is unlikely to put pressure on banks to increase dividend pay-outs considering the capital requirements of the banks," the analyst with the foreign brokerage firm said.

Also, banks are not allowed to issue bonus shares, according to banking sector regulations, said analysts.

"Past definitions of public sector units also have excluded banks from their purview," an analyst with a domestic bank-backed brokerage said.

The consensus candidates for this increased dividend pay-out and bonus shares seem to be metal and oil public sector units.

If, however, the government chooses to include banks within the ambit of these guidelines, the action is likely to have a negative impact on bank stocks, analysts added.