Calcutta, April 13: Public sector banks are reluctant to follow the finance ministry?s directive seeking higher dividends.

The ministry had sought higher dividends from the banks for the last financial year to bolster non-tax revenues.

Some of the banks have even decided to approach the finance ministry. With the banks? accounts already closed, it is now time for them to decide on the dividends, based on profitability.

Banking sources said the government wants an increase of at least 20 per cent over the previous financial year (2003-04).

?This will have an impact on the profitability of the banks. We are extremely concerned,? said senior officials of State Bank of India and Bank of Baroda.

In 2003-04, public sector banks, insurance companies and the Reserve Bank of India together paid close to Rs 11,8239 crore to the government as dividend.

This was to partially offset the shortfall in tax revenues and ensure that the fiscal deficit stays within estimated levels.

However, some of the banks have indicated that paying higher dividends to the government in 2004-05 will result in erosion of capital and will constrain their ability to expand risk weighted assets.

Some of them feel the dividend demand would impact even their lending to the agriculture sectors.

At present, the banks have a capital adequacy ratio of about 12 per cent. Around 9 per cent of this is Tier I capital, while the rest is Tier II capital.

Unlike the last three years, in 2004-05, most of the banks were saddled with large depreciation provisions, senior bank officials said.

This was due to a fall in the value of their securities portfolios with the hardening of yields. As a result, the banks had to transfer them to the held-to-maturity category from the available-for-sale category. The move had resulted in some losses for the banks.

Some of the banks had sought amortisation of these losses over the residual period of the maturity of the securities. This would have considerably reduced the impact on the profit and loss account.

But with the Reserve Bank remaining silent on the issue, most banks preferred to make a one-time provision for losses during the third quarter. Besides, bankers had sought the RBI?s permission to make the provisions out of the investment fluctuation reserve (IFR).

Under the RBI guidelines, banks are expected to make a provision equivalent to 5 per cent of the value of their investments as the IFR.