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Draft Guidelines for Declaration of Dividend and Remittance of Profit

Reserve Bank of India (RBI) has released draft guidelines on declaration of dividend by banks and remittance of profits to head office by foreign bank branches in India.

To whom shall the guidelines be applicable?

The guidelines shall be applicable to all commercial banks [including Regional Rural Banks (RRBs), Local Area Banks (LABs), Small Finance Banks (SFBs), and Payments Banks (PBs)].

The guidelines shall be applicable –

  • To banks for declaration of dividends.
  • To foreign banks operating in India in the branch mode for remittance of profits to their head office.

From when shall the guidelines be applicable?

The guidelines shall be effective for declaration of dividends for the FY 2024-25 and onwards.

When can bank declare dividends / remit profits?

Banks shall meet the following prudential requirements to be eligible to declare dividends or remit profits.

  • Capital Adequacy – Bank shall have met the applicable regulatory capital requirement for each of the last 3 financial years including the financial year for which the dividend is proposed.
  • Net NPA – Net NPA ratio, for the financial year for which the dividend is proposed, shall be less than 6%.
  • Other Criteria – 
    • The bank should comply with Sections 11(2)(b)(ii), 15, and 17(1) of the Banking Regulation Act, 1949, as applicable.
    • The bank shall be compliant with the applicable laws, regulations / guidelines issued by Reserve Bank of India (RBI) including, inter alia, creating adequate provisions for impairment of asset and employee benefits, transfer of profits to Statutory Reserves etc.
    • RBI should not have placed any explicit restrictions on the bank for declaration of dividends or remittance of profits.

What are regulatory capital requirements as on the date of the draft guidelines?

 

 Commercial Banks (excluding RRBs, LABs, SFBs, and PBs) Small Finance Banks (SFBs) Payments Banks (PBs) Local Area Banks (LAB) Regional Rural Banks (RRBs)
Common Equity Tier (CET) 1 5.5% 6% 6%

 

 
Additional CET 1 Applicable to Domestic Systemically Important Banks (D-SIBs)

 

 

 

 
Capital Conservation Buffer (CCB) (comprised of Common Equity) 2.5%

 

 

 

 
Minimum CET1 and CCB 8%

 

 

 

 
Minimum Tier 1 capital 7% 7.5% 7.5%

 

 
Minimum Total Capital 9%

 

 

 

 
Minimum Total Capital (CRAR)

 

 15% 15% 9% 9%
Minimum Total Capital including CCB (CRAR) 11.5%

 

 

 

 

What shall be the quantum of dividend?

Banks eligible to declare dividends, may pay dividend, subject to the following –

  • Dividend Payout Ratio is the ratio between the amount of the dividend payable (including interim dividends) in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed [Dividend Payout Ratio  = (Dividend Payable ÷ Net Profit) * 100].
  • Proposed dividend payable shall include dividend on equity shares only.
  • In case the net profit for the relevant period includes any exceptional and / or extra-ordinary profits / income, or if the financial statements are qualified (including ‘emphasis of matter’) by the statutory auditor that indicates an overstatement of net profit, the same shall be reduced from net profit while determining the Dividend Payout Ratio.
  • The ceilings on dividend payout ratios are as under –

Net NPA Ratio for the financial year for which dividend is proposed Maximum Dividend Payout Ratio (%)
Zero 50
More than 0 but less than 1% 40
More than or equal to 1% but less than 2% 35
More than or equal to 2% but less than 4% 25
More than or equal to 4% but less than 6% 15

What shall be the criteria for remittance of profits?

A foreign bank operating in India in branch mode, that satisfies the eligibility criteria, may remit net profit / surplus (net of tax) of a quarter or year, earned in the normal course of business arising out of its Indian operations, without prior approval of RBI, provided that the accounts of the bank are audited and in the event of excess remittance, the head office of that foreign bank immediately makes good the shortfall.

What are the reporting requirements?

Banks declaring dividend or remitting profits to Head Office shall report to RBI or National Bank for Agriculture and Rural Development (NABARD) (in case of RRBs) within a fortnight of declaration of dividend or remitting profits to Head Office.


References

Reserve Bank of India. (2024, January 02). 'Declaration of dividend by banks and remittance of profits to Head Office by foreign bank branches in India'. Retrieved from https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4364

Reserve Bank of India. (2024, January 02). 'RBI releases draft circular on declaration of dividend by banks and remittance of profits to Head Office by foreign bank branches in India'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57052


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