The Hindu Business Line : RBI's new rules do not inhibit bank dividends

ON April 27, the first day of trading after the RBI notified its rules governing dividend declaration, Bankex, the free-float banking sector index, dropped 3.8 per cent. The index lost more than that of the market as the interpretation then was that central bank had tightened norms for dividend declaration.

The Reserve Bank had linked dividend declarations without its approval to banks achieving 11 per cent capital adequacy ratio (for three successive years) and bringing down non-performing assets to less than 3 per cent. Just a month later those rules don't appear to be a piece of restrictive legislation but precisely the opposite.

Consider this:

Of the 33 listed banks, as many as 15 banks qualified to declare dividends without seeking RBI's approval. Dividend rules have, after all, not posed insurmountable problems. These banks have, on an average, jacked up dividends by about 40 per cent.

Of the 18 banks that had to seek RBI approval, eight banks have increased dividends while six have maintained dividends. In addition, six banks will in all likelihood qualify to declare dividends without RBI's approval in year ended March 2005.

For instance, Punjab National Bank obtained RBI approval for enhancing dividends from 35 per cent to 40 per cent. Mr S.S. Kohli, Chairman and Managing Director of PNB, said that RBI was concerned about the capital adequacy ratio and provisioning requirements. If those conditions were satisfied and dividend payout was also not high, then enhancing dividends was not a problem, he added.

The dividend declaration norms of RBI, too, make the point that the focus of regulation has now shifted to `dividend payout ratio' from `quantum of dividend.' This also is in line with the thinking of the banking sector.

For instance, Dr P.J. Nayak, Chairman and Managing Director, UTI Bank, says, "The dividend policy for UTI Bank has been to keep to a payout ratio of about 25 per cent, and you will see that we have generally adhered to this in recent years. We believe this strikes a good balance between rewarding shareholders and retaining earnings which help to build up the capital base of the bank."

There is only one area of concern though. Banks that use capital efficiently and which grow faster may be forced to consistently seek RBI approval while banks which have high capital adequacy will not need to. When Mr Kohli's attention was drawn to this aspect, he laughed off such a suggestion. He added that from a long-term perspective, RBI's norms are conducive to consistent dividend declaration.

Mr Nayak, for his part, said, "Clearly the guidelines offer incentives to banks to keep a vigilant eye on their capital adequacy and the proportion of their impaired assets."

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