The RBI on Friday barred all commercial and cooperative banks from paying dividends to shareholders and promoter groups as the regulator fears the Covid-driven economic shocks would continue longer and may put the health of the financial system at risk.

The decision will hit the already scuppered finances of the Centre, given the massive shocks to the economy from the lockdown and the already falling growth rates which have brought down demand for loans and thus the profitability of banks.

“It is imperative that banks conserve capital to retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty,” RBI governor Shaktikanta Ds said.

This restriction shall be reviewed on the basis of the financial position of banks as of the September 2020 quarter.

Avnish Jain of Canara Robeco AMC said, “Stopping dividend payments from banks would impact the government’s non-tax revenue.”