Financial Stability Report flags Public Sector Banks’ higher dividend outgo despite low profits

MUMBAI(PTI): Financial Stability Report (FSR) has warned against Public Sector Banks’ (PSBs) proclivity to pay higher dividends even as profits have been heading south and asked them to be careful till their balance sheets are cleaned up.

Reserve Bank of India

“It is observed that state-run banks pay out significant amounts as dividend to the government and other shareholders, which have no relevance to their balance sheet strengths and capital planning,” said the report released by the Reserve Bank of India (RBI) on Thursday.

It has been learned that the 26 state-run banks have cumulatively paid around Rs 20,000 crore in dividends last fiscal, even as their profits fell close by 4.5%.

It said this reveals a cross-subsidisation by better banks, given their relatively higher payouts, but a disproportionately higher capital infusion into weaker banks by the government.

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This pattern of dividend payouts is not consistent with the dividend irrelevance theory, the report said.

“Thus, it is imperative that PSBs approach their dividend decisions as strategic business decisions, which are in keeping with their objective of shareholder wealth maximisation,” the report said.

The report further said while the PSBs continue to play a vital role in the economy and financial system with over 72% market share, they have been lagging their private sector counterparts on performance and efficiency indicators.

At present, PSBs with a predominantly high share in infrastructure financing are observed to be facing the highest amount of stress in their asset quality and profitability.

“Despite their developmental objectives, PSBs as financial intermediaries, need to operate on commercial considerations, to remain viable,” it said.