The Bangladesh Bank should stand firm against the bank directors and shareholders’ desire for dividends
Two recent actions by the regulatory authorities concerning dividend payments are worthy of comment.
Bangladesh Bank issued a notice that limited the total and cash dividends that could be paid by banks to their shareowners. The limits were linked to the capital adequacy ratio of the bank. [See Box]
The first observation is that the banks are not in a very good financial condition.
Deferral of the booking of instalments on loans has resulted in improved profitability of the banks. But this improvement is largely an illusion.
When the required instalment payments are booked into the accounts, many loans will be headed towards classification if the necessary payment from 2020 instalments are not met.
The interest due has been posted to income even if not paid, resulting in an increase in income that may never be received.
The lending programme to overcome the impact of the pandemic opens up all kinds of uncertainty about the future financial condition of the banks.
The Tk 5,000 crore lent to export industries may face recovery problems if the garment sector recovers slowly.
The banks’ financial accounts for December 2020 will not accurately reflect the financial condition of the bank as it artificially inflates income.
There is a massive rescheduling of loans with many uncertainties as to producers and methods.
Until the Bangladesh Bank inspectors examine what has been undertaken, the outcome for 2020 banks financial operations is very uncertain.
It is a very bad idea to allow banks to pay any cash dividends from this faulty estimate of accounting income.
One can understand that there is heavy pressure from the bank boards to pay dividends. Nevertheless, when entering into a period with the potential weakness it is a serious error to permit the banks to weaken their financial position.
If, as I anticipate there will be pressure on the banks as loans become classified due to the inability to pay 2020 dues, then the BB will be confronted with requests for forbearance on booking provisions or meeting capital requirements.
While this unwinding of the real situation of loan recovery will take time to emerge it is certainly coming.
Students of the banking system are fully aware that the financial system is facing major uncertainties. [Not just for Bangladesh but everywhere.]
Further, the complex of alternatives laid out in the BB’s notice is too difficult; the quality of the bank’s accounts is not that good when it comes to assessing and covering provisioning requirements.
This type of complexity leads to accounts manipulation. Much better, if one has to do this, is to pick a low number such as 5 per cent and prescribe that as the maximum cash dividend that can be paid.
Dividends in the form of shares would be acceptable as these places no strain on the bank’s financial stability.
The banks doing this are simply diluting their capital or raising some additional capital. Upon the announcement, the share price will decline by whatever is the increment of shares outstanding.
In December 2019, the average capital adequacy of the private banks was 13.6 per cent against a requirement of 12.5 per cent. The base is risked weighted assets. [See Box]
This suggests that few private banks have excess capital above their required level.
I estimate deferred provisions are about 2 to 4 per cent of the loan portfolio, most of which will reduce capital.
Thus, any action that reduces capital [as issuing dividends does] are very risky in the present condition.
The BB should stand firm against the bank directors and shareholders’ desire for dividends.
If dividends are issued, banks will soon ask for forbearance from booking required provisions, enabling such banks to appear to maintain capital adequacy.
But this does not really fool anybody.
The second action was the Bangladesh Securities and Exchange Commission’s demand that Robi pays a dividend.
The point is not Robi’s explanation of why they choose not to authorise a dividend but that the BSEC has no basis for such a demand.
The listed company should be allowed to manage its affairs as it sees fit.
The BSEC does not have the knowledge or the judgment to decide for the company managers the appropriate level of dividends.
This is a clear interference of government over private property rights.
Robi’s first year as a listed company has been successful. But this follows several years of negative returns. Any prudent company would do as Robi is doing.
The shareholders should not appreciate an uninformed actor second-guessing their management.
There are many problems in the capital markets and the BSEC has been working to solve these.
However, it is simply not the job of the BSEC to be worried about prices. That is the preserve of the market.
If one wants a strong capital market then it is imperative to focus on the real issues and not market rules and manipulations to keep share prices high.
There seems to be a widespread belief that the published audit reports of listed companies are suspect.
The BSEC has a clear duty to investors to ruthlessly clean this up.
It is impossible to have a functioning share market if the audits are distrusted.
Efforts to attract foreign investors to the capital markets are dependent on confidence in the audit reports.
This is the single most important issue in improving the capital market.
Some steps that may help. There is a case for an independent supervisory board responsible to the chairman of the BSEC that monitor the performance of auditors, issue warnings of delinquencies and ultimately recommend an auditor be banned from working for listed companies.
The audit firms have shown they cannot police themselves.
There is also the need for making audits more meaningful in assessing the actual financial condition of the company. But there are some points.
First, the real condition of loans taken by the company should be described, including any classification imposed by the lending bank. Shareholders have the right to such information.
Second, if the listed company is a member of a group of companies then the relationships with other groups of companies should be clearly laid out in the audit.
There are numerous such indicators of the real situation of the enterprise often not included in the audit.
The BSEC can improve the format for audits.
In the same way, the BSEC should discipline the rating agencies. At present, the ratings are of little value.
The BB must not be cowed by bank directors wanting more income when the underlying condition of the banking sector is so fragile.
The central bank staff have a full understanding of the weaknesses of the banking system and recognise that the next two or three years require building up capital levels while incorporating the impact of Covid-19 ravages into the accounts of the banks.
Cash dividends should be banned until 2023.
The BSEC should focus on real issues.
It is not the BSEC’s responsibility by law or by good practice to control the price movements other than preventing trading on insider knowledge.
Given the strong growth potential of the economy, foreigners will come to the market, but only if there are good audit reports.
Actually, trying to drive the price above its natural market level by government interventions results in harming people who are tricked into buying shares at prices higher than their true worth.
Such intervention harms some citizens and benefits others in a random way. This is not good public policy.
The author is an economist