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RBI advises banks not to make any dividend payouts from profits pertaining to the FY ended March 2020

Reserve Bank of India
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Reserve Bank of India

Highlights

In view of the economic shock caused by the COVID-19 pandemic, the Reserve Bank of India (RBI) has advised banks not to make any dividend payouts from profits pertaining to the financial year ended March 2020.

In view of the economic shock caused by the COVID-19 pandemic, the Reserve Bank of India (RBI) has advised banks not to make any dividend payouts from profits pertaining to the financial year ended March 2020.

In a statement, RBI said it is imperative that banks continue to conserve capital to support the economy and absorb losses if any. In view of the COVID-19 pandemic, RBI had asked to withhold payment of dividends until September 2020.

In response to the pandemic, RBI has focused on the resolution of stress among borrowers, and facilitating credit flow to the economy, while ensuring financial stability, RBI Governor Shaktikanta Das said.

"In continuation of this effort and to help banks conserve capital, while creating room for fresh lending, it has been decided after a review that commercial and co-operative banks will retain the profits and not make any dividend pay-out from the profits pertaining to the financial year 2019-20," he said.

On further review, RBI has said that conserving such payment will further strengthen banks' balance sheets while supporting lending to the real economy.

The statement further informed that the apex bank will soon be releasing draft guidelines for Non-Banking Financial Institutions - NBFCs, who would be allowed to declare dividend as per a matrix of parameters. It said that the decision has been made in view of the increasing significance of NBFCs in the financial system and their inter-linkages with different segments.

In April, RBI had announced that scheduled commercial banks (SCBs) and cooperative banks shall not make any dividend payouts from profits pertaining to the financial year ended March 31, 2020, until further instructions, which shall be reassessed based on financial results of banks for the quarter ending September 30, 2020.

Unlike banks, RBI said, currently there are no guidelines in place with regard to the distribution of dividend by non-banking financial companies (NBFCs).

"Keeping in view the increasing significance of NBFCs in the financial system and their interlinkages with different segments, it has been decided to formulate guidelines on dividend distribution by NBFCs. Different categories of NBFCs would be allowed to declare dividend as per a matrix of parameters, subject to a set of generic conditions. A draft circular in this regard will be issued shortly for public comments," he said.

RBI further said the ombudsman mechanism instituted by the Reserve Bank is an alternate grievance redress mechanism.

"To enhance the efficacy of the grievance redress mechanism in banks, it has been decided to put in place a comprehensive framework comprising inter alia (i) enhanced disclosures on customer complaints, (ii) monetary disincentives in the form of recovery of the cost of redress of complaints, and (iii) undertaking an intensive review of grievance redress mechanisms and supervisory action against regulated entities failing to improve their redress mechanisms," he said.

The framework would be put in place during January 2021, RBI said.

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