Despite a record-setting year of profit, the NBFI is unable to reward shareholders as it deems fit
The Bangladesh Bank’s move to cap the amount of cash dividends that banks and non-bank financial institutions can give out to shareholders for 2020 with the view to boost the lenders’ capacity to absorb the spike in bad loans that will invariably take place this year -- is indeed an admirable stance.
Thanks to the loan moratorium facility extended in 2020 to enable borrowers to better navigate the economic riptide brought on by the global coronavirus pandemic, many lenders’ books were in shipshape.
But with the lifting of the facility from January, it is universally expected that there will be a gush of bad loans this year. Can the financial institutions handle the avalanche?
And it is in keeping this mind that the BB has ringfenced banks’ capital base by putting checks on their dividend policy.
But for the banks and NBFIs that have adequate capital buffer, is such a policy fair for their shareholders? And particularly when some of the lenders are coming off record-breaking year of profit.
This is the conundrum that IDLC Finance, the country’s largest non-bank financial institution, finds itself in.
In 2020, the NBFI posted the highest profit yet in its 35-year history.
It logged in a profit of Tk 254.1 crore for its 2020 financial year, which runs from January to December, up 49.5 per cent from a year earlier.
And during the course of the year, the NBFI strengthened its cash flow, which is the net amount of cash and cash-equivalents being transferred into and out of a business.
At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows.
Positive cash flows indicate that a company is adding to its cash reserves, allowing it to reinvest in the company, pay out money to shareholders or settle future debt payments.
At the end of 2020, IDLC’s net operating cash flow per share -- which is all cash generated by its main business activities -- stood at Tk 9.05, in contrast to Tk 4.87 in the negative a year earlier.
Subsequently, the company announced a 35 per cent cash dividend for the year, which is the same as in the previous two years.
But the NBFI has now found itself afoul of the regulator for rewarding its shareholders way more than what is allowed under the dividend policy, which calls into question the regulators’ ability or unwillingness to differentiate between strong lenders and weak lenders.
On February 4, the BB instructed IDLC Finance to be conservative in declaring dividends for the concluding year in anticipation of a spike in default loans in the upcoming days. It, however, did not give any ceiling for dividend declaration.
The central bank also asked the NBFI to maintain its financial statements for the year of 2020 as per the International Financial Reporting Standards.
“If the external auditor found any provision shortfall, it will have to be kept immediately,” said the letter sent to IDLC Finance.
Dhaka Tribune has a copy of the letter.
The instruction came after the central bank inspected the NBFI’s financial statement of IDLC Finance.
Less than two weeks later, the board of directors of IDLC Finance recommended the dividend.
Then on February 24 came the instruction from the BB that stated the NBFIs were not allowed to declare cash dividends upwards of 15 per cent.
This prompted IDLC Finance to ask the BB to make an exception for it as it has the capacity to absorb the shocks.
“We were able to declare more dividend as we made a good profit in the year of 2020,” said Arif Khan, the outgoing managing director and chief executive officer of IDLC Finance.
And the board had made the dividend recommendation before the BB notice came in.
However, the final approval of the dividend will come during the annual general meeting scheduled for March 31 this year.
“We sent a letter to the central bank seeking guidelines about the issue because we already declared a 35 percent cash dividend. Now, we are waiting for the reply of the central bank,” said Khan, who leaves the NBFI after five years on March 31.
Top officials of the NBFI led by M Jamal Uddin, deputy managing director of IDLC Finance, met with the BB on Wednesday over the issue.
“The central bank would view the matter from the perspective of the shareholders,” Uddin told Dhaka Tribune on Wednesday.
Meanwhile, the Bangladesh Merchant Bankers Association (BMBA) has also requested the BB to revise its dividend policy.
The BB notice had an adverse impact on the country’s stock market, the BMBA said in its letter to the BB governor on March 1.
But BB officials said that there is no plan to revise the notice at this moment because the financial health of most of the NBFIs is not good at all.
At the end of the third quarter of 2020, the 33 NBFIs’ bad loans accounted for about 15.5 per cent of their total outstanding loans of Tk 66,215.4 crore, according to data from the central bank. Three months earlier, default loans accounted for 13.3 per cent of the outstanding loans.
Between July and September last year, default loans at the NBFIs soared 49.8 per cent from a year earlier despite the loan moratorium facility throughout the year.
The general investors though are up in arms over the BB’s stance.
“We are shocked by the central bank’s decision during the dividend announcement season,” said Salauddin Sobuz, a retail investor.
He went on to blame the lack of coordination between the BB and the Bangladesh Securities and Exchange Commission for the disjointed decision.
“It is the central bank’s responsibility to determine the amount of liquidity of the bank, but it cannot decide how much dividend an NBFI can pay,” said Abu Ahmed, an honorary professor at the Dhaka University’s economics department and a stock market analyst.
The BB should revoke the notice and allow the NBFIs to pay dividends as per their ability to their retail investors.
Shares of IDLC, which got listed in 1992, had gained 41.2 per cent in 2020. Since the BB’s announcement of dividend, IDLC’s stock price gained about 1.6 per cent. On Wednesday, IDLC shares closed at Tk 65.4.