In a significant move, the Reserve Bank of India (RBI) has proposed revised guidelines to facilitate banks with a net non-performing assets (NPAs) ratio below 6% to declare dividends. The current norms require banks to maintain a net NPA ratio of up to 7% to qualify for dividend declarations.
“The net NPA ratio, for the financial year for which the dividend is proposed, should be less than six per cent,” stated the RBI in its draft guidelines on dividend declaration. The proposed changes have been reviewed in light of implementing Basel III standards, revising the prompt corrective action (PCA) framework, and introducing differentiated banks, the RBI announced.
These revised guidelines are aimed to be implemented from the financial year 2025 onwards, intending to offer banks more flexibility in dividend declarations. The RBI highlighted specific criteria for various types of banks to be eligible for declaring dividends. It stated that commercial banks must maintain a minimum total capital adequacy of 11.5%, small finance banks and payment banks should retain 15%, while local area banks and regional rural banks must maintain a 9% total capital adequacy.
Notably, the RBI proposed an increase in the upper limit of the dividend payout ratio to 50% from the previous 40%, specifically applicable if a bank’s net NPA stands at zero. This proposed change marks a relaxation from the existing norms and could allow banks with healthier financial standings to distribute higher dividends.
The draft circular also made it explicit that the RBI would not entertain any requests for “ad-hoc dispensation on declaration of dividend.” Moreover, concerning foreign banks, the RBI proposed that these banks might remit net profits or surplus from Indian operations without the central bank’s prior approval. However, in case of excess remittance, the draft mandates the foreign bank’s head office to offset the shortfall immediately.
Stakeholders and the public have been invited to provide feedback and suggestions on the draft circular by January 31. The RBI’s proposal seeks to recalibrate dividend declaration norms, considering various financial parameters and the evolving regulatory framework, aiming to bring about more flexible yet prudent banking practices.
