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Central Bank eases restrictions of discretionary payments by licensed banks.

The Central Bank of Sri Lanka has eased the restriction of discretionary payments including payment of cash dividends by licensed banks.

The monetary authority has reassessed the restrictions, and on 19 January 2021 permitted licensed banks to pay cash dividends and repatriate profits after completion of the audit of the financial statements for the year 2020.  

When deciding payment of cash dividends and repatriation of profits for the year 2020, licenced banks are expected to consider assets growth, business expansion and the impact from COVID-19 pandemic, CB said in a media release.  

Further, licensed banks were required to refrain from engaging in share buybacks and increasing non-essential expenditure, while exercising extreme due diligence and prudence when incurring capital expenditure until 30 June 2021.

Deteriorating asset quality and the associated higher credit costs are expected to keep banks’ profitability lower in 2021 than pre-2019 levels, despite improvement from 2020 profitability.CB said.

Previously, the Central Bank, on 13 May 2020 decided to restrict certain discretionary payments of licensed banks, such as declaring cash dividends and repatriation of profits, engaging in share buy backs, increasing management allowances and payments to the Board of Directors until 31 December 2020 with a view to strengthening the liquidity and capital positions of licensed banks under exceptional circumstances amidst the COVID-19 pandemic.

Banks are emerging largely unhurt from the pandemic due to regulatory forbearance measures on capital and liquidity, moratoria, leniency on recognising loss provisions and large amounts of liquidity made available for on-lend as well as to backstop borrowers from defaulting.

However, the Central Bank called on licensed banks to take into account capital requirements under Basel III, expected asset growth, business expansion and the impact of the pandemic when deciding on the payment of the cash dividend.

“Licensed Commercial Banks shall also refrain till 30 June 2021 from buying back its own shares, increasing management allowances and payments to Board of Directors, exercise prudence and refrain to the extent possible from incurring non-essential expenditure such as advertising, promotions, gift schemes, entertainment, sponsorships, travelling and training.”

The circular also insisted banks exercise due diligence and prudence when incurring any capital expenditure.

Fitch ratings in a special report titled ‘Sri Lanka Banks Report Card 2020’, released in December warned sluggish economic activity, external and domestic vulnerabilities, muted private credit growth and the sovereign’s weakened credit profile are significant downside risks to the operating environment for Sri Lankan banks.

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