Skip to main content

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


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Reserve Bank of India Act, 1934 – Part-II – Section 17 to 19

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the second article in the series.  Section 17 – Business which the Bank may transact RBI shall be authorized to carry on and transact the several kinds of business hereinafter specified, namely – 17(1) – Accept deposit without interest from the Central / State Government, local authorities, banks and any other persons. 17(1A) – Accept deposit, repayable with interest, from banks or any other person under the Standing Deposit Facility Scheme, as approved by the Central Board, for the purposes of liquidity management.   Bills of Exchange (B/E) & Promissory Note (PN) Bearing 2 or more good signatures, one of which shall be of B/E & PN arising out of Maturing within 17(2)(a) Purchase, sale and rediscou...
Post a Comment
Read more

Reserve Bank of India Act, 1934 – Part-I – Preamble and Section 1 to 13

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the first article in the series. Preamble of the Act RBI to – Regulate the issue of bank notes. Keep reserves for monetary stability in India. Operate currency and credit system of the country to its advantage. The primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth. Chapter I – Preliminary Section 1 – Short title, extent and commencement 1(1) – This Act may be called the Reserve Bank of India Act, 1934. 1(2) – The Act extends to whole of India. Chapter II - Incorporation, Capital, Management and Business Section 3 – Establishment and incorporation of Reserve Bank 3(1) – RBI to take over management of the currency from the Central Government. 3(2) – RBI to have perpetual succession, common seal, and shall by...
Post a Comment
Read more

Reserve Bank of India Act, 1934 – Part-III – Section 20 to 40

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the third article in the series.  Chapter III - Central Banking Functions Section 20 – Obligation of the Bank to transact Government business RBI shall undertake – To accept monies for account of the Central Government and to make payments up to the amount standing to the credit of its account, and to carry out its exchange, remittance and other banking operations. Management of the public debt of the Union. Section 21 – Bank to have the right to transact Government business in India The Central Government shall entrust RBI with – All its money, remittance, exchange and banking transactions in India, and shall deposit free of interest all its cash balances with RBI. The Central Government may carry on money transactions at places where RBI has no branches or agencies and m...
Post a Comment
Read more

Reserve Bank of India Act, 1934 – Part-IV – Section 42 to 45

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the fourth article in the series.  Section 42 – Cash reserves of scheduled banks to be kept with the Bank 42(1) – Every bank included in the Second Schedule shall maintain with RBI an average daily balance at a percent (notified by RBI) of its total demand and time liabilities in India. 42(1A) – RBI may direct every scheduled bank to maintain with RBI, in addition to the balance prescribed under Section 42(1), an additional average daily balance at a rate (specified by RBI). 42(1C) – RBI may specify any transaction or class of transactions to be regarded as liability in India of a scheduled bank. If any question arises as to whether any transaction or class of transactions shall be regarded as liability in India of a schedule bank, the decision of RBI thereon shall be fina...
Post a Comment
Read more

Reserve Bank of India Act, 1934 – Part-V – Section 45B to 45JA

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the fifth article in the series.  Chapter IIIA - Collection and Furnishing of Credit Information Section 45B – Power of Bank to collect credit information RBI may collect credit information from banking companies and furnish it to any banking company in accordance with section 45D. Section 45C – Power to call for returns containing credit information RBI may direct any banking company to submit statements relating to credit information. Section 45D – Procedure for furnishing credit information to banking companies A banking company may apply to RBI to provide credit information. RBI shall furnish the requested credit information without disclosing the names of the banking companies which have submitted the information. RBI may levy fees of up to Rs.25 for furnishing credit...
Post a Comment
Read more