The Hindu Business Line : Govt seeks higher dividends from PSBs, insurers

Bangalore, Feb. 2 Faced with a prospect of a breach in fiscal targets and revenue shortfalls, the Government has asked banks and financial institutions to pay higher dividends.

Better operating profits of public sector banks have prompted the Government to make such demands, banking sources said.

Public sector banks have managed to book large profits from both lending and non-lending activities, especially treasury operations, during the last quarter.

For the current financial year, dividend receipts from the public sector banks, financial institutions, insurance companies and the Reserve Bank of India is estimated at Rs 18,445 crore. Public sector banks’ dividend payouts last year were about Rs 8,042 crore. This year, public sector banks alone are expected to cough up about Rs 11,000 crore. In Q3, these banks had defended or improved their net interest margins at close to 3 per cent.

This was on the back of the high credit offtake by corporates. Banks have managed to operate at nominal credit deposit ratios of close to 75 per cent during the current year, as corporates shifted from cross border funding sources to the domestic banking system.

High pricing

Moreover, corporate credit offtake from the domestic banking system was at rates close to about 12 per cent. Bankers said that this year, the high pricing of loans allowed them to defend their net interest margins.

In the case of insurers, the Government’s dividend demands were on the basis of profits earned from selling investments. This financial year, however, insurers’ profits from equities trading were drastically pruned. Earnings from equity trading are likely to be only about Rs 250 crore, PSU insurers said. Moreover, with the slide in yields, coupon flows from the new series of securities were also down, the sources said. Mean yields are now down to less than 8 per cent unlike last year when it was over 9.5 per cent.

However, among both public sector banks and insurers, there was resistance towards paying higher dividends. Bankers said that this year most of them are expected to step up lending efforts or increase risk weighted assets. Most of them were very close to the floor of Tier-I capital, assuming the current pace of non-food credit offtake. Banks are currently expected to maintain a Tier-I capital ratio of 6 per cent. According to the Reserve Bank of India’s Third Quarter Monetary Policy review, non-food credit offtake was 24 per cent on a year on year basis. Already banks are facing capital pressures to sustain this growth.

Accordingly, bankers said that if dividend payouts were stepped up, banks’ ability to sustain credit growth would be impacted. For insurers, the high dividend payments are likely to impact solvency.

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More Stories on : Public Sector Banks | PSU | Insurance | Dividend Announcement

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