Source: Business Standard
Context:
The Reserve Bank of India has issued revised guidelines on dividend declaration by banks, linking payouts to capital adequacy and asset quality. The new framework caps dividend payouts at 75% of Profit After Tax (PAT) and will come into effect from FY27.
Key Provisions of the New Norms
1. Dividend Cap
- Banks can distribute dividends up to 75% of PAT for the relevant financial year.
2. Link with Capital Adequacy
- Dividend eligibility depends on the Common Equity Tier-1 (CET1) ratio, a key measure of a bank’s capital strength.
- Banks with CET1 levels just above the regulatory minimum cannot declare dividends.
- Banks with stronger capital buffers may distribute up to 100% of adjusted PAT, but still within the overall 75% PAT cap.
3. Adjusted PAT Calculation
Adjusted PAT =
PAT – 50% of Net Non-Performing Assets (NPAs) as on March 31 of the financial year.
This adjusted figure determines the maximum dividend that can be paid.
Additional Conditions
Before declaring dividends, banks must ensure:
- Compliance with regulatory capital requirements even after payout.
- No RBI-imposed restrictions on dividend distribution.
- Consideration of factors such as:
- Divergence in asset classification and provisioning identified by RBI.
- Observations in statutory auditors’ reports.
- Current and projected capital position.
- Long-term growth and expansion plans.
Restrictions on Dividend Sources
Dividends cannot be paid from certain income sources, including:
- Extraordinary or exceptional income
- Unrealised gains from fair valuation (Level-3 financial instruments)
- Profits affected by audit qualifications or overstatement of earnings
Norms for Foreign Banks
Foreign banks operating in India in branch mode may remit profits to their head offices without prior approval if:
- They meet regulatory eligibility conditions.
- Their accounts have been audited.
Any excess remittance must be returned
