RBI Guidelines on Bank Dividend Payouts
The Reserve Bank of India (RBI) has revised guidelines regarding bank dividend payouts, offering more flexibility to better-capitalized banks.
Key Changes in Guidelines
- Dividend payouts are now linked to a bank's Common Equity Tier 1 (CET1) ratio rather than the capital-to-risk weighted assets ratio (CRAR) and net non-performing advances (NPAs).
- Banks will deduct 50% of net NPAs (post-provision) from profit after tax to compute profit eligible for dividend, instead of the entire net NPA as initially proposed.
- The maximum allowable payout is 100% of adjusted PAT, capped at 75% of reported PAT.
Implications for Banks
- The guidelines take effect from April 1, 2027.
- Banks with stronger CET1 buffers will significantly contribute to the sector's total dividend limit increase.
- It is estimated that most scheduled commercial banks will experience an increase in dividend payout limits under the new norms.
Specific Provisions for Foreign Banks
- Foreign banks operating as branches can remit post-tax profits from Indian operations without prior RBI approval, provided accounts are audited.
- Remittances cannot be made from extraordinary gains or auditor-flagged profit overstatements.
Framework Details
- Payout bands are aligned with CET1 "buckets," allowing distributions from 0% to 100% of adjusted profit after tax depending on the bank’s end-FY CET1 ratio.
- The aggregate dividend in any year cannot exceed 75% of reported PAT.
- Systemically important banks are assessed against a CET1 threshold including their Domestic Systemically Important Banks (D-SIB) buffer, noted as “z”.
Eligibility Criteria for Banks
- Banks must comply with regulatory capital requirements by the end of the previous financial year and remain compliant after the proposed payout.
- They must post a positive adjusted PAT for the period and have no explicit supervisory curbs.
- Adjusted PAT is defined as PAT minus 50% of net NPAs as of March 31 for the relevant year.
