The Reserve Bank of India (RBI) released a draft proposal on Tuesday to tighten rules for banks' dividend declarations, suggesting a reduction in the net non-performing asset (NPA) ratio required for dividend eligibility. According to the proposal, feedback on this draft can be submitted until 31 January, with the proposed norms affecting dividend declarations starting from FY25.
The RBI's proposal recommends that for a bank to declare dividends, its net NPA ratio for the relevant financial year should be below 6 per cent, down from the current requirement of 7 per cent. Additionally, banks must meet the regulatory capital requirement for the last three financial years, including the one for which the dividend is proposed.
The existing provision allowing banks with a capital adequacy ratio (CAR) of at least 9 per cent to declare dividends despite not meeting capital adequacy norms if their net NPA ratio is less than 5 per cent is not included in the draft.
The proposed changes also address different types of banks, specifying varying minimum capital adequacy ratio requirements for public-sector, private-sector, and foreign banks. Moreover, the draft proposes capping the dividend payout ratio at 50 per cent of the net profit for the financial year.
The draft emphasises that banks' boards should consider NPA classification and provisioning divergences, capital positions, and long-term growth plans while determining dividend payouts. It also outlines that dividends payable should only include dividends on equity shares.
To ensure transparency, the proposed norms highlight the exclusion of exceptional profits from net profit calculations for dividend payouts. Additionally, foreign banks operating in India in the branch mode are permitted to remit net profits without prior RBI approval, provided their accounts are audited.
These proposed guidelines will be applicable to all commercial banks, RRBs, local area banks, SFBs, and payments banks. The RBI mentioned that these guidelines were reviewed concerning the implementation of Basel III standards, revised prompt corrective action frameworks, and the advent of differentiated banks. The draft proposes the repeal of all previous circulars on dividend declaration and profit remittance by foreign banks operating in India.