Should banks suspend dividends in preparation for stormy days ahead? | The Daily Star
12:00 AM, April 02, 2020 / LAST MODIFIED: 12:33 AM, April 02, 2020

Taming coronavirus rampage

Should banks suspend dividends in preparation for stormy days ahead?

The European Central Bank (ECB) has asked banks in the eurozone to not pay any dividend in order to boost their capacity to absorb losses that will invariably take place for the global coronavirus pandemic that has brought the world down on its knees.

This will support banks to widen lending capacity to households, small businesses and corporate entities during the ongoing financial crisis as well, according to a press release issued by the ECB, the central bank of the 19 countries of the EU.

Lenders of the eurozone should not pay dividends for the financial years 2019 and 2020 until at least October 1, it said.

In a similar move, the Bank of England (BoE), the central bank of the UK, also ordered lenders to cancel plans to offer dividend for shareholders and cash bonuses for executives as it asked financial institutions to boost their strength ahead of a likely recession.

Against the backdrop, the UK's largest lenders -- Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered -- confirmed on Tuesday that they would temporarily halt shareholder pay-outs for 2019 and throughout 2020.

Although the ECB and the BoE have almost implemented their plan, Bangladesh's central bank has yet to start any thinking to this end.

When the issue was raised to officials concerned of the central bank yesterday, they told The Daily Star that the Bangladesh Bank should take the same measure in the interest of the country's financial sector as whole.

Banks and non-bank financial institutions will be able to set aside more than Tk 2,500 crore if they do not provide dividend to their directors and shareholders.

Some 30 banks and 23 NBFIs listed with the capital market provided cash dividend amounting Tk 1,670 crore in 2018.

There are 94 banks and NBFIs operating in Bangladesh. 

A severe liquidity crunch is prevailing in the market as individuals and corporate entities have withdrawn a large volume of deposits from banks in recent days to tackle the impending financial crisis emerging from the coronavirus outbreak, they said.

Banks will get room to lend more if the central bank takes the measure barring them from providing dividend.

Although the central bank cut cash reserve ratio by 50 basis points to 5 per cent in order to inject Tk 6,400 crore into the market, this is not enough given the gravity of the financial crisis, the officials said.

But they feared that the central bank would face different challenges in implementing the move as directors of private banks usually enjoy more than 50 per cent of the total lenders' dividends per year.

"And they have a strong political link, so they may oppose the decision," said a central bank official requesting anonymity to speak candidly on the matter.

The government was earlier even forced to amend the Banking Companies Act 1991 to allow sponsors of private bank to hold directorship for nine years instead six and have four of their family members in the board in place of two.

The Daily Star yesterday spoke with six managing directors of banks on the issue. None agreed to speak on record given the sensitivity of the matter.

They said the proposal of scraping dividend for the time being is good as it will help them give out loans to affected sectors.

"Besides, incentive bonus for top executive of banks should be scrapped as well," said a managing director of a listed bank.

He, however, said the retail investors of the capital market will face losses temporarily, but they should accept the proposal in the interest of the financial sector.

"If banks face significant losses in the days ahead, they will not give anything from them."

He, however, said the central bank should take a strict stance on the issue such that banks could use the dividends as loans.

Four banks have already proposed to offer dividend, but there is still room to backtrack from the stance as such decisions are finalised at the annual general meetings, which have been postponed for the coronavirus outbreak in Bangladesh, he said.

The central bank will take the decision promptly as other banks will declare their dividend within a week or two, said a high official of the financial sector regulator.

The BB has also cut the policy rate by 25 basis points to 5.75 per cent such that banks can avail funds at a cheaper rate, said a central bank official whose job is to monitor the money market.

"But we are apprehending that people will not deposit money in banks anytime soon as the coronavirus is likely to stay in the country for long."

This means the ongoing liquidity crunch may prolong, so banks will need more funds in the days to come to run their operations smoothly, the official said, adding that directors of banks should take the impending crisis into account.

Asked whether the central bank would take any measure to stop providing dividend, its spokesperson Md Serajul Islam said the BB would take a call on the matter once the lockdown is lifted.

With a view to containing the transmission of the highly contagious novel virus, the government on March 23 announced general holiday from March 26 to April 4. The holidays were extended by a week to April 11.

"We have to take the opinion from the Bangladesh Securities and Exchange Commission to this end before taking such a decision," Islam added.

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