Banks barred from declaring dividends, bonuses as capital rules eased to fight COVID-19

• CB relaxes guidelines on recognising non-performing loans and loss provisions
• Banks now can provide additional 60 days for loans falling into past due in March 
• CB allows banks to draw down from capital conservation buffers under BASEL III capital rules
• Two more years given to banks which are yet to meet minimum regulatory capital 

The Central Bank has barred banks from declaring dividends and paying bonuses to their management and staff amid the Monetary Board deciding to relax certain capital rules to assist the banking sector recognising the far-reaching support extended by them to the businesses and individuals affected by the COVID-19 crisis.

The Central Bank last week instructed all banks and licensed finance and leasing companies to participate in the Rs.50 billion refinancing facility, comprised of debt moratoriums up to six months for businesses and individuals and working capital loans for eligible customers at 4.0 percent interest rate, with interest payments waived off for six months. 

In a letter sent to all chief executive officers of the licensed commercial banks and licensed specialised banks, the Central Bank has relaxed guidelines on recognising non-performing loans and their loss provisions, easing payment terms for loan customers and permitting conversion and recovery of loans in foreign currency to rupee-denominated loans, where necessary. 

The banks now have the authority to provide with borrowers additional 60 days for loans, which fell into past due in March. 

Hence, the banks will not recognise these facilities as past due until the end of the 60-day concessionary period, with respect to the borrowers who currently do not enjoy any other concession. 

All these measures will ease pressure on banks’ earnings and thereby the capital, giving more wiggle room for them to extend more loans with little worry over replenishing capital for some time, compared to the time when the rules where stubborn. 

Further, in a direct relief on capital adequacy standard, the Monetary Board has also allowed the banks to draw down from their capital conservation buffers, which were mandated to be built up as part of the new BASEL III capital rules. 

As a result of these eased capital adequacy rules, the Domestic Systematically Import Banks (DSIBs) will be allowed to draw down 100 basis points of their capital conservation 
buffer while the non-Domestic Systematic Banks can retrieve 50 basis points from a total of 250 basis points of 
the buffer. 

This will release capital for banks for lending and earn interest income, which otherwise would have been held in idle to meet a regulatory requirement. 

But how much of capital gets released from the move would depend on the individual bank’s capital levels at present. 

The capital conservation buffer is part of the BASEL III rules, which were to come into full effect from January 2020, to ensure the banks have enough capital to weather shocks in the financial system after the collapse of Lehman Brothers in the US sent shock waves across mortgage markets and entire financial system elsewhere in the world. 

With the economic toll of COVID-19 is expected to be worse than the global financial crisis in 2008, this period will become the real test of the strength of the global banking system since then. 

Meanwhile, the Monetary Board also extended the time for those banks, which are yet to meet the minimum regulatory capital of Rs.20 billion by two years, from 2020-end to 2022-end.

However, this deferment comes with strings attached as those banks are required to restrict cash dividend to 25 percent of distributable profits in 2019 and 2020. 

Despite the easing capital rules, the Central Bank urged the banks to monitor their risk profiles and resources while the regulator will also continue to closely monitor liquidity and capital positions of the banks and will send any early warnings of stress to ensure the safety and soundness of the banking sector. 

Besides, the Central Bank has also extended timelines by three months from May 30, for those who are required to address supervisory concerns found during their annual Central Bank audits. 

Further, the Central Bank has also extended timelines for banks by one month for submission of statutory returns for publication of quarterly financial statements, until 
further notice.