RBI pulls up UCBs creating Dividend Equalisation Fund for payments

Gives one time permission to transfer corpus to reserves

The Reserve Bank of India today asked Urban Cooperative Banks to stop the practice of setting up a Dividend Equalisation Fund (DEF) to pay dividends in the future, as current rules distinctly prohibit making such payments from previously accumulated profits or reserves.

As a one-time measure, it permitted UCBs to transfer the money in the DEF to general reserves/free reserves to provide better treatment of these balances for regulatory capital purposes. The credit balances in general reserves/free reserves shall qualify as Tier-I capital, RBI said in a communication to UCBs.

Some UCBs have created the Dividend Equalisation Fund (DEF) through appropriation of profits. This was done with the intent to utilise these balances to pay dividends in future years, when profits are not sufficient or where the bank has posted a net loss, RBI added.

RBI rules specifically mandate that dividends can only be paid from the net profit of the current year after making all statutory and other provisions and after adjustment for accumulated losses in full. UCBs have been considering the balances in DEF as part of Tier-II capital, RBI pointed out.