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Central Bank restricts banks to make discretionary payments

The Central Bank has suspended cash dividends by licensed banks incorporated in Sri Lanka, among a host of other restrictions on discretionary payments, effective immediately until December 2022.

The aim of the CB is to ensure that they maintain sufficient liquidity and capital buffers through the prevailing macroeconomic commotion.

This is the second time the Central Bank brought in similar styled restrictions on banks’ discretionary payments since March 2020 when the country went into lockdowns for the first time due to the pandemic, to insulate the sector from possible stress on its liquidity, capital and other key performance indicators.

These preemptive measures and the Central Bank liquidity provided to backstop banks in 2020 helped the sector immensely to emerge stronger than ever as banks delivered their best performance in 2021, even amid months-long lockdowns, which buffeted growth to a greater degree.

In its latest measures, the Monetary Board on May 6 issued fresh directions to, “every licensed bank incorporated or established in Sri Lanka”, asking them to, “defer payment of cash dividends until the financial statements/interim financial statements for the year 2022 are finalised and audited by its external auditor”.

The direction doesn’t appear to be an outright ban but one that is contingent on financial performance and impact on the banks’ minimum capital requirements under BASEL III regulations. BASEL rules stipulate a minimum amount of capital every bank must maintain in relation to their risk weighted assets or in other words, loans and advances.

As Sri Lanka on April 12 announced its decision to suspend most of its foreign currency debt, several studies have been conducted thereafter to gauge as to what extent the country’s banks’ capital profiles could get affected in case of a debt restructuring as they own a section of International Sovereign Bonds (ISBs) as part of their foreign currency assets.

The Central Bank has made it clear that Sri Lanka Development Bonds and rupee bonds would not be subjected to restructuring assuaging concerns for the banks.

Apart from the suspension on cash dividends, the Central Bank also brought down curtains on banks buying back their own shares, increasing management allowances and payments to board of directors, and on incurring non-essential and non-urgent expenditure.

The Central Bank also asked banks to exercise extreme due diligence and prudence when incurring capital expenditure.

Meanwhile, licensed banks incorporated outside Sri Lanka have also been barred from repatriating profits, which are not already declared for financial years 2021 and 2022 until the financial statements for 2022 are finalised and audited.

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