RBI issues draft rules on dividend payout by banks

The Reserve Bank of India (RBI) has issued draft norms on declaring bank dividends and remittance of profits to head office by foreign bank branches in India. The central bank has laid down rules on board oversight, eligibility criteria and the quantum of dividends payable.

The RBI in its circular says the bank board should consider the divergence in classification and provisioning for non-performing assets (NPAs), including its trend, before declaring dividends. Other aspects to keep in mind are qualifications and emphasis of matters in the auditors’ report to the financial statements, current and projected capital position and capital requirement, and long-term growth plans.

Banks should also meet certain prudential requirements before they declare dividends or remit profits. First is capital adequacy. "Bank shall have met the applicable regulatory capital requirement for each of the last three financial years, including the financial year for which the dividend is proposed," says the RBI.

Secondly, the net NPA ratio for the financial year for which the dividend is proposed should be less than 6%. Other criteria to be considered before declaring dividends are banks must comply with sections 11(2)(b)(ii), 15, and 17(1) of the Banking Regulation Act, 1949; applicable laws, regulations or guidelines issued by the RBI; and the RBI should not have placed any explicit restrictions on the bank for declaration of dividends or remittance of profits.

Additionally, banks should pay dividends only on equity shares, according to the draft circular. In case the net profit for the relevant period includes any exceptional or extraordinary profits/income, or if the financial statements are qualified by the statutory auditor that indicates an overstatement of net profit, it will be reduced from net profit while determining the dividend payout ratio.

Notably, the dividend payout ratio is the ratio between the amount of the dividend payable in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed.

As per the draft circular, a foreign bank operating in India in branch mode may remit net profit or surplus of a quarter or year, earned in the normal course of business arising out of its Indian operations, without prior approval of the RBI. This is provided the accounts of the bank are audited and in the event of excess remittance, the head office of that foreign bank immediately makes good the shortfall.

Banks declaring dividends or remitting profits to head office will report details to the RBI's department of supervision within a fortnight of the declaration of dividends or remitting profits.

The central bank says the circular is applicable to all commercial banks and these guidelines will be effective for declaration of dividends for FY25 and onwards. Comments on the draft circular have been invited from banks, market participants, and other stakeholders by January 31, 2024.