SBP directs banks to suspend dividend payment

State Bank of Pakistan believes it will strengthen financial institutions’ capacity to absorb losses

KARACHI: The central bank has directed commercial banks to suspend profit payment in cash or in shape of shares to their shareholders in order to strengthen the capacity of financial institutions to lend and absorb any losses which they may incur in the wake of coronavirus pandemic.

“The central bank’s directive will badly shatter investors’ confidence and may spark selling at Pakistan Stock Exchange (PSX),” a stockbroker said while talking to The Express Tribune.

PSX is already suffering from the impact of Covid-19 pandemic. The international oil price crisis has added to the gloom. At such a time, the suspension of dividends may worsen the crisis for investors, he said.

“Long-term investors buy stocks that pay dividends. The new directive will encourage trade in speculative stocks that do not pay dividends and traders buy them on the bet their prices will go up,” he said.

Banks have roughly 20% weight in the benchmark KSE 100-share Index at the PSX. A large number of investors had bought banking stocks ahead of announcement of their financial results.

“Three banks have already announced dividends for the quarter ended March 31, 2020, including Allied Bank Limited, Habib Bank Limited and MCB Bank,” he said.

SBP said in a statement that those banks which announced divided by April 22 should suspend dividend for the quarters ending June 30, 2020 and September 30, 2020.

The central bank notification reads, “With a view to conserving capital and further enhancing the lending and loss absorption capacity, bank/DFI/MFB(s) are advised to suspend distribution of profit by way of declaring dividends in any manner (cash or stock) for the quarter ended March 31, 2020 and half year ending June 30, 2020.”

“State Bank of Pakistan (SBP) will review the above instructions on the distribution of dividends after June 30, 2020 keeping in view the severity and impact of Covid-19 and economic dynamics for the safety and soundness of the banking system,” it said.

These instructions will not be applicable to the dividends declared for the year ended December 2019.

“You (financial institutions) are advised to place this letter before the board of directors of your bank/DFI/MFB,” the central bank notification said. “However, if the board of directors considers it necessary to declare the dividend in the wake of the institution’s specific circumstances, it may approach the SBP with sound justifications for consideration of the request on merit.”

To mitigate the impact of Covid-19, the SBP announced a host of regulatory relief measures including lowering the capital conservation buffer (CCB) - which increased the supply of liquidity by around Rs800 billion in the banking system - and relaxation of criteria for rescheduling of loans.

“The aim of these regulatory reliefs is to boost the lending capacity of banks, avoid any adverse impact on their asset quality and ensure a continuous flow of credit to support economic activity in these pressing times,” the SBP notification said.

Financing to pay salaries

The central bank said it had reduced the mark-up to 3% for financing to be availed by tax-paying businesses to pay salaries, down from 4% announced earlier this month in response to the Covid-19 pandemic.

However, the mark-up rate for non-tax paying businesses remained unchanged at 5%.

“Moreover, banks have also been encouraged to provide loans without any collateral ie taking clean exposure of up to Rs5 million,” the SBP said in a statement. “These additional incentives are effective as of today (Wednesday).”

The SBP has introduced further incentives to support employment and avoid layoffs by companies and businesses.

These additional incentives include relaxations in collateral requirements, further reduction in end-user rate, reimbursement of wages, special accounts for employees to receive wages, borrowing from banks other than maintaining payrolls, simplification of application form for SMEs and bank’s exposure limits.

Published in The Express Tribune, April 23^rd, 2020.

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