In a major move to conserve capital, the State Bank of Pakistan (SBP) on Wednesday directed banks to suspend the disbursement of dividends for March and June 2020 quarters.

Leading bankers have confirmed Business Recorder that SBP has asked financial institutions for suspension disbursement of dividends for the first two quarters of this year.

According to a formal directive issued by Banking Policy and Regulations Department of SBP to mitigate the impacts of COVID-19 pandemic, State Bank of Pakistan announced a host of regulatory relief measures through various circulars on 26 March 2020.

These measures, among others, include lowering the Capital Conservation Buffer (CCB) and relaxation of criteria for rescheduling/restructuring of loans.

The aim of these regulatory reliefs is to boost the lending capacity of banks, avoid any adverse impact on their asset quality and to ensure a continuous flow of credit to support the economic activity in these pressing times.

With a view to conserving capital and further enhancing the lending and loss absorption capacity, banks/DFIs/MFBs are advised to suspend distribution of profits by way of declaring dividends in any manner (cash or stock) for the quarter ending March 31, 2020 and half year ending June 30, 2020. These instructions will not be applicable on dividend declared for the year ended December 2019.

Banks have been advised to place this directive before Board of Directors of banks/DF1s/ MFBs. However, if Board of Directors considers it necessary to declare the dividend in the wake of the Institution's specific circumstances, it may approach SBP with sound justifications for consideration of request on merit.

According to circular, the State Bank of Pakistan will review these instructions on distribution of dividends after June 30,2020 keeping in view the severity and impact of the COVID-19 and economic dynamics on the safety and soundness of the banking system.

According to an announcement by SBP on Wednesday night, this important decision has been taken keeping in view uncertainty arising out of COVID 19 pandemic and probability of higher infections in loan portfolios of banks as a result of that. This measure will also enhance loss absorption capacity of the banking system and will enable them to further support the real sector in Pakistan.

The banks/DFIs in Pakistan have much higher capital levels than prescribed globally or minimum levels advised by the State Bank of Pakistan. SBP is confident that the suspension of dividend payout will further increase the resilience of banking sector and improve their ability to provide much needed credit support to the real economy. SBP will keep on closely monitoring the performance of banks/DFIs under its regulatory domain and take appropriate action as needed to ensure safety and soundness of individual banks/DFIs and the overall banking system.