CB asks banks not to declare dividends till annual accounts are audited for 2020

• Issues new guidelines suspending any cash dividend payouts or profit repatriations

The latest in a string of measures by the Monetary Board to ensure that the banks operate with adequate liquidity and capital, the Central Bank (CB) this week issued fresh guidelines suspending any cash dividend payouts or profit repatriations for 2020, until the annual accounts are finalised and audited.

The Monetary Board last year at the height of the pandemic issued instructions to do the same to avert possible liquidity squeezes in banks. But on the contrary, the banks’ liquidity skyrocketed in the months following the pandemic, as people and businesses stockpiled cash in their bank accounts while the demand for private sector credit fizzled in the immediate aftermath of the first wave.

In fact, the excess liquidity became a burden for banks as their liabilities fattened while the asset growth decelerated, which weighed on their net interest incomes. 

In a fresh Direction issued this week, the Monetary Board said, “Every licensed bank incorporated or established in Sri Lanka shall defer payment of cash dividends until financial statements for the year 2020 are finalised and audited by its external auditor.” 

Further, “Every licensed commercial bank incorporated outside Sri Lanka shall defer repatriation of profits not already declared for financial years 2019 and 2020,” until the 2020 accounts are audited. 

However, the Direction is not an outright ban on the payment of dividends or profit repatriations, as it is contingent on expected asset growth, business expansion and the impact of the COVID-19 pandemic. 

The December quarter earnings season is about to kick off in earnest and the banks are expected to have fared better than expected from the rebound in private sector credit, which started from August. 

The banks have also been asked to refrain from buying back their own shares and increasing management allowances and payments to board of directors until June 30, 2021. Further, banks have asked to exercise prudence and refrain to the extent possible from incurring non-essential expenditure such as advertising, business promotions, gift schemes, entertainment, sponsorships, travelling, training, etc. 

Also, banks have been asked to exercise extreme due diligence and prudence when incurring capital expenditure, if any.