The Hindu Business Line : PSBs resist Govt demand for higher dividend

During the last fiscal year, public sector banks, insurance companies and the Reserve Bank of India together had paid close to about Rs 11,8239 crore. This was to partially offset the shortfall in tax revenues and ensure that the fiscal deficit was contained within the estimated level.

However, some of the banks have indicated that paying higher dividends to the Government would result in an erosion of their capital and constrain their ability to expand their risk weighted assets portfolio. In fact, some of them have said the dividend demand would impact even their lending to the agriculture sectors.

Currently, the banks have a capital adequacy ratio of about 12 per cent. About 9 per cent of this is Tier I capital and the rest Tier II capital. Besides, the bankers said, unlike the last three years, this year, most of them were saddled with large depreciation provisions. This was due to the fall in the value of their securities portfolios with the hardening of yields. Although banks were given a one-time reprieve by the RBI through a change in the nomenclature (from 25 per cent of investment to 25 per cent of demand and time liabilities), bankers said transfers to the held-to-maturity (HTM) category from the available-for-sale (AFS) category would result in some losses for them.

Some of the banks had sought amortisation of these losses over the residual period of the maturity of the securities. This would have considerably reduced the impact on the profit and loss account.

But with the RBI remaining silent on the issue, most banks preferred to make a one-time provision for losses during the third quarter. Besides, bankers had sought the RBI's permission to make the provisions out of the investment fluctuation reserve.

Under the RBI guidelines, banks were expected to make a provision equivalent to 5 per cent of the value of their investments as the IFR.

Most large banks have already reached this figure and, accordingly, wanted to make the depreciation out of the IFR. The sources said unless the RBI allowed this, they would end up making more provisions if the current trend continued in the bond markets.

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