As banks are suffering from cash crunch during the current slowdown, finance ministry may allow them to use a significant portion of their FY09 profits to enhance business rather than to pay dividend to shareholders.

A senior official at the finance ministry said that the cash strapped PSU banks would be permitted to expand their business with the income earned during 2008-09. The finance ministry has spotted out PSU banks including UCO Bank, Canara Bank, Allahabad Bank, Bank of India, United Bank and Bank of Baroda that would be allowed to pay lower dividend to their shareholders.

Further the minister said that more banks would be allowed to adopt this flexibility.

Normally a PSU bank pays a minimum 20% of post-tax profits as dividend but now they may be allowed to pay lower dividends. Banks would be required to decided their new dividend and get it approved by the finance ministry individually. However the reduced dividends would only be allowed to banks if they are using their profits for expansion approved by the government.

Further the official said that banks would also need to meet the capital-to-risk weighted asset ratio (CRAR). As per the RBI guidelines, banks are required to maintain a minimum CRAR 9%.

There are smaller PSU banks that fear their CRAR to go below 6.5-7% if they announce higher dividends and also expand their business. As a result several banks have approached the government to allow them to pay dividends below the minimum level.

At the same time, banks are also unable to continue with their expansion plans due to insufficient funds at the back of global meltdown.

Commenting on the situation, the official said that, "We don't want banks to suffer. The move is in the government's long-term interest." Some of the banks may be allowed to pay lower dividends as total dividend from PSU banks has already crossed the revised budgetary target by Rs 400 crore in 2008-09. So, "It would not add to the fiscal deficit," he added.

Earlier the proposal for paying lower dividends was discussed at a meeting between the senior officials in the Planning Commission and banks officials.