RBI Tightens Banks’ Dividend Payout Norms

The Reserve Bank of India has issued final guidelines tightening dividend distribution by banks, linking payouts to capital strength and asset quality to ensure financial stability.

Key Provisions of the New Guidelines

1. Dividend Cap
   • Banks can distribute a maximum of 75% of their net profit as dividends in a financial year.
2. Adjusted Profit Calculation
   • Dividend eligibility will be based on Adjusted Profit After Tax (PAT).
   • Adjusted PAT will be calculated by deducting 50% of net Non-Performing Assets (NPAs) from the net profit.
   • Earlier proposals suggested deducting 100% of NPAs, which has now been relaxed.
3. Restrictions on Exceptional Income
   • Banks cannot declare dividends from exceptional or non-recurring income, as such gains are considered temporary.

Capital Adequacy Conditions

Banks must meet the following requirements before declaring dividends:

• Maintain required regulatory capital levels, including Common Equity Tier-1 (CET1) ratio.
• Ensure capital levels remain above regulatory requirements even after dividend distribution.
• Have positive adjusted PAT in the relevant financial year.

For foreign banks operating in India in branch mode, dividend remittance is allowed only if they have positive net profit.

RBI’s Position on Industry Requests

The RBI rejected several suggestions from banks:

• Using current year CET1 ratio instead of the previous year’s ratio.
• Allowing dividends from exceptional income.
• Postponing implementation until the adoption of expected credit loss (ECL) norms.