SINGAPORE, July 28 (Reuters) - The Monetary Authority of Singapore (MAS) said on Wednesday it was removing caps on dividends paid by locally incorporated banks and finance companies, which were introduced amid an uncertain economic outlook earlier in the COVID-19 pandemic.

Last year, the central bank had urged them to cap their total dividends per share for the fiscal year 2020 at 60% of the previous year's level.

The central bank cited the improving global economic outlook for not extending the restrictions.

"Local banks and finance companies have weathered the pandemic well and are in a strong position to support the economic recovery," Ho Hern Shin, deputy managing director at the MAS, said.

Banks and finance companies had also been encouraged to offer shareholders the option of receiving the dividends to be paid for 2020 in scrip in lieu of cash.

On Wednesday, the MAS said banks and finance companies had maintained strong capital adequacy ratios and continued to meet the credit needs of individuals and businesses, despite higher levels of provisioning made during the pandemic.

Under the latest stress tests, these ratios are projected to remain resilient even under an adverse macroeconomic scenario caused by a stalled global recovery, leading to the Singapore economy slipping into another recession in 2021, the MAS said.

"As downside risks remain, local banks and finance companies should exercise continued prudence in their discretionary distributions, whilst prioritising support to customers," Ho said.

The government expects gross domestic product to expand 4% to 6% this year, although growth could exceed the upper end of that forecast. The bellwether economy had posted its worst recession last year. (Reporting by Aradhana Aravindan in Singapore Editing by Ed Davies)