Banks with over 10% NPLs face dividend ban for 2025

• Banks can't offer cash dividends from retained earnings
• Banks with outstanding penalties or fines for failing to maintain CRR or SLR ineligible to pay dividends
• Banks with shortfall in required provisions or those that have obtained deferrals to address such shortfalls will also be barred
• Even compliant lenders' dividends now capped at 30% of their paid-up capital

The Bangladesh Bank has imposed a number of restrictions on banks' dividend payouts to strengthen the financial health of the country's embattled banking sector and protect depositors, according to a circular issued today (13 March).

Under the new guidelines, banks with non-performing loans (NPLs) exceeding 10% of their total loans will be barred from distributing dividends to shareholders.

The move is expected to disqualify many banks from paying dividends in 2025 as the industry will enter into a tougher loan classification rule from April this year. 

As of December 2024, 23 banks out of 61 had more than 10% NPLs and the sector's average NPL ratio stood above 20% last year driven by state banks' too classified loans.

The restrictions, which take effect for the financial year ending 31 December 2025, are part of a broader tightening of the central bank's dividend distribution framework.

Also, banks will no longer be allowed to offer cash dividends from retained earnings, and those that have outstanding penalties or fines for failing to maintain their statutory cash reserve ratio (CRR) or statutory liquidity ratio (SLR) will be ineligible to pay dividends altogether.

Banks that have a shortfall in required provisions, or those that have obtained deferrals to address such shortfalls, will also be barred from making dividend payouts under the revised rules.

Even for compliant lenders, dividends are now capped at 30% of their paid-up capital. 

However, banks maintaining a capital adequacy ratio (CAR) of at least 15% – including the 2.5% capital conservation buffer – will be permitted to pay up to 50% in dividends, provided that the payout does not cause their CAR to fall below 13%.

Those with a CAR of 12.5%, including the conservation buffer, will be allowed to distribute up to 40% in dividends. Lenders with CAR between 10 and 12.5% will be limited to issuing stock dividends only.

The Bangladesh Bank's directive reflects mounting concerns over the resilience of the country's banking system, which has come under scrutiny for persistently high levels of bad debt and capital shortfalls.

While bankers said the measure could prevent many banks from declaring dividends, underscoring the scale of distress in the sector, policymakers hope the tougher rules will encourage banks to strengthen their balance sheets and prioritise depositor protection over shareholder returns.  

What bankers and economists say

The managing directors of several private banks have revealed that sponsor-directors are taking loans from different banks anonymously through mutual agreements and not repaying them. As a result, the financial health of many lenders has deteriorated. 

Furthermore, when these sponsor-directors sit on the boards of the banks, they approve dividends despite the banks' poor financial condition. Since the sponsor-directors own a large portion of the banks' shares, they are also the primary beneficiaries of the dividends. 

The central bank's new rules could help curb these irregularities to some extent, they added.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard that the dividend policy for banks has been made somewhat stricter. 

He added that this move will help ensure better governance in the banking sector.

Commenting on the impact of the new decision on the country's stock market, the seasoned banker said, "Earlier, many banks used to give dividends to shareholders even by taking the provision of deferral benefits. Now, that will be discontinued."

"As a result, the share prices of the banks may be affected."

Fahmida Khatun, executive director of the Centre for Policy Dialogue, said, "If the health of a bank is not good, then why would they give dividends?"

She said the Bangladesh Bank has imposed new instructions to ensure that the management focuses on improving the health of their banks. 

"This will ultimately benefit the banking sector," hoped the economist.