RBI Issues Draft Circular On Banks' Eligibility For Dividend Payout
The RBI has sought comments from banks, market participants, and other stakeholders by Jan. 31.
The Reserve Bank of India has issued a draft circular on the declaration of dividend by banks, stating eligibility criteria and other requirements.
Guidelines for foreign banks to remit profit to their head offices are also reviewed in the circular released on Tuesday.
Currently, scheduled commercial banks declare dividend and foreign bank branches remit profit, subject to compliance with the guidelines issued in 2005 and 2003, respectively.
"These guidelines have been reviewed in light of the implementation of Basel III standards, the revision of the prompt corrective action framework, and the introduction of differentiated banks," the RBI said in the circular.
Under the norms, banks' net non-performing asset ratio—for the financial year for which the dividend is proposed—must be less than 6%. Even the capital adequacy ratio of banks should have met the RBI's capital requirements of 9% for the last three financial years to announce dividends, the central bank said.
This circular is applicable to all commercial banks, including regional rural banks, local area banks, small finance banks, and payment banks.
The RBI has mandated payment banks and small finance banks to maintain a capital adequacy ratio of 15%. Others are required to maintain 9% of CRAR on an ongoing basis.
The dividend payout ratio—or the ratio between the amount of the dividend payable in a year and the net profit for the financial year—will be determined by the level of the net NPA ratio.
According to the draft circular, banks eligible to declare dividend must pay it only on equity shares.
The RBI also clarified that it will not accept any ad hoc requests on declaration of dividend.
For foreign bank branches operating in India, the eligibility criteria remains the same. Having met the requirements, the foreign bank may remit quarterly or annual net profit to the head office, the RBI said.
These guidelines will come into effect in FY25 and onwards.
The RBI has sought comments from banks, market participants, and other stakeholders by Jan. 31.
Experts said that the RBI's draft circular is aimed at building robust and stable banking system in the long-term.
"Even though a few public sector banks may fall short of the 6% NPA ratio criteria, they have high provisioning. This means they can write-off those (bad) loans and qualify for giving dividends," Asutosh Mishra, lead banking analyst at Ashika Stock Broking, told NDTV Profit.
Jyoti Prakash Gadia, managing director at Resurgent India, said that the move to directly link dividend payout to net NPA levels underline the importance of a healthy credit portfolio, long-term profitability and sustained capital adequacy for future growth and stability.
"Declaration of dividend will depend not only on current strength and compliance level of the bank as regards (to) profitability and NPAs, but also on potential higher requirements of capital and reserves in the near future," Gadia said.
