RBI proposes to cap banks' dividend payout at 75% of net profit

The Reserve Bank of India (RBI) on Tuesday came out with a draft framework on declaration of dividend by banks, as it proposed capping dividend payout to shareholders at 75 per cent of their net profit-- also called profit after tax (PAT).

 

The draft regulations suggest compliance with applicable regulatory capital norms at the end of the previous financial year and continued compliance in the year of payout, with capital levels remaining above regulatory thresholds even after dividend payment. 

Indian banks must report positive adjusted PAT for the relevant period, while foreign banks operating in branch mode must have positive PAT to remit profits to their head offices. 

In addition, banks must not be subject to any explicit restrictions imposed by the RBI or any other authority.

 

The RBI undertook a review of the existing prudential norms governing the declaration of dividends and remittance of profits, including those applicable to foreign banks operating in branch mode in India. As part of this exercise, a draft of the revised framework was released for public comments on January 2, 2024. Following stakeholder feedback and consultations, the RBI has now issued draft directions proposing a revised methodology for computing the maximum eligible dividend payout.

 

Foreign banks that meet the eligibility criteria may remit net profits earned from Indian operations without prior RBI approval, provided their accounts are audited.

 

Any excess remittance must be promptly returned by the head office. For the purpose of calculating PAT, banks are required to exclude exceptional or extraordinary income and any overstated profits flagged by statutory auditors. Dividends or profit remittances cannot be funded from unrealised gains on fair valuation of Level 3 financial instruments, or from certain provision reversals and unrealised gains linked to loan transfers, in line with existing RBI directions.

 

The RBI has retained the right to restrict dividend distribution or profit remittance in cases of non-compliance, with no special dispensation available if eligibility conditions are not met.

 

Non-compliance with these directions may attract supervisory or enforcement action.