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C. Shivkumar

Bangalore , Nov. 17

THE Government has set its sights on the large treasury profits generated by the public sector banks and asked them to make interim dividend payments.

Highly-placed banking sources said that the PSU banks were told to alternatively to increase the quantum of dividends paid out for the current fiscal year. For the year, the estimates for dividend receipts from public sector banks, financial institutions and the Reserve Bank of India is Rs 10,700 crore.

But the sources said that the Ministry of Finance has already indicated that the Government would like to have a higher dividend receipts. This is despite the fact that in some of the banks, the Government equity holding has already been diluted through further equity issues and partially through equity buyback. The sources said that the Government had made this demand in view of the expected revenue short falls during the current year from both tax and non-tax sources. The demand for additional dividends was to partially offset this anticipated fiscal slippage, the sources added.

Besides, the sources said, that the Government had also pointed out that some of the banks were likely to show large profits on account of the securities buyback in July. Many of the banks, which had participated in the securities buyback are expected to be using the profits earned for creation of floating provisions.

This essentially implied they were doing this as a contingency against any future asset stress. Only a handful of banks actually needed the funds to make provisions. Besides, most of the PSU banks have conservative accounting system and have already made provisions on the basis of the income recognition guidelines to come into effect from March 31 2004. These guidelines prescribe that debt servicing dues beyond 90 days would have to be treated as non-performing assets. Consequently these surpluses are now expected to become part of the reserves.

Further the sources said the MoF had also pointed out that banks had made large trading profits due to the soft interest rate regime. In fact, the sources said that the government move had come close on the heels of the second quarter of the banks. Most of them had shown large increases in profits and almost 50 per cent of these profits were driven by the treasury operations. When the dividend estimates for the current year were made, the ten-year yield on gilts was in the region of about 6.2 per cent. Currently it is in the region of about 5.1 per cent, implying an appreciation in the value of investments part of which had translated to trading profits.

The sources said that each of the banks was expected to make recoveries to the extent of at least Rs 250 crore to Rs 300 crore of non-performing assets. Consequently, the sources said that estimates in the Ministry were that the banks could afford to foot a higher dividend bill, without impairing the capital adequacy.

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