Skip to main content

Declaration of dividend by UCBs

Reserve Bank of India (RBI) has issued guidelines on treatment of Dividend Equalisation Fund (DEF) maintained by Primary (Urban) Co-operative Banks (UCBs).

What are the guidelines on declaration of dividend by Primary (Urban) Co-operative Banks (UCBs)?

Primary (Urban) Co-operative Banks (UCBs) may declare dividend without prior permission of Reserve Bank of India (RBI) subject to compliance with the following parameters –

  • Compliance with CRAR norms.
  • Net NPA of less than 5% after making all necessary provisions (including provisions required as per assessment made by RBI in the last inspection report).
  • There is no default in CRR / SLR during the year for which dividend is proposed.
  • All required provisions have been made for NPAs, investments and other assets as per prudential norms.
  • Dividend is paid out of the net profit and after making all statutory and other provisions and adjustment for accumulated losses in full.

UCBs complying with all the above parameters except net NPA, and desirous of declaring dividend may approach RBI for permission for declaring dividend provided the Net NPA is less than 10%.

What are other guidelines on payment of dividend by UCBs?

  • The rate of dividend payable to the investors will be a fixed rate or a floating rate referenced to a market determined rupee interest benchmark rate.
  • The payment of dividend by the bank shall be subject to availability of distributable surplus out of current year’s profits, and if –
    • CRAR is above the minimum regulatory requirement.
    • Impact of such payment does not result in bank's CRAR falling below or remaining below the minimum regulatory requirement.
    • Balance sheet as at the end of the previous year does not show any accumulated loss.
  • The dividend shall not be cumulative, i.e., dividend missed in a year shall not be paid in subsequent years even if adequate profit is available and the level of CRAR conforms to the regulatory minimum. 
  • When dividend is paid at a rate lesser than the prescribed rate, the unpaid amount will not be paid in future years, even if adequate profit is available and the level of CRAR conforms to the regulatory minimum.

What are the guidelines on treatment of Dividend Equalisation Fund (DEF)?

The following violations were observed regarding Dividend Equalisation Fund (DEF) maintained by UCBs –

  • Some UCBs have created the Dividend Equalisation Fund (DEF) through appropriation of profits, with an intent to utilise these balances to pay dividend in future years, when profits are not sufficient or where the bank has posted a net loss. 
  • UCBs have also been considering the balances in DEF as part of Tier-II capital.

However, the extant guidelines prohibit dividend payments from previously accumulated profits or reserves and mandate that dividend can only be paid by the banks from net profit of the current year after making all statutory and other provisions and after adjustment for accumulated losses in full. Therefore, as a one-time measure –

  • The balances in the DEF shall be transferred to general reserves / free reserves. 
  • The credit balances in general reserves / free reserves, shall qualify as Tier-I capital.

Suitable disclosures shall be made of such transfers in the ‘Notes on Accounts’ to the Balance Sheet.


References

Reserve Bank of India. (2012, July 05). 'Declaration of dividend by UCBs'. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=7426&Mode=0

Reserve Bank of India. (2024, July 30). 'Guidelines on treatment of Dividend Equalisation Fund (DEF)- Primary (Urban) Co-operative Banks (UCBs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12714&Mode=0

Reserve Bank of India. (2024, April 01). 'Master Circular - Prudential Norms on Capital Adequacy - Primary (Urban) Co-operative Banks (UCBs)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=12654


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Report of the Committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector

Reserve Bank of India (RBI) has released the report of the committee to develop a framework for responsible and ethical enablement of artificial intelligence (FREE-AI) in the financial sector. Committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector In the financial sector, Artificial Intelligence (AI) has the potential to unlock new forms of customer engagement, enable alternate approaches to credit assessment, risk monitoring, fraud detection, and offer new supervisory tools. At the same time, increased adoption of AI could lead to new risks like bias and lack of explainability, as well as amplifying existing challenges to data protection, cybersecurity, among others. To encourage the responsible and ethical adoption of AI in the financial sector, the committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector (Chairperson: Dr. Pushpak B...
Post a Comment
Read more

Lending against Gold and Silver collateral

Reserve Bank of India (RBI) has issued directions on lending against the collateral of gold and silver. To whom are the directions applicable? The directions are applicable to the following regulated entities (REs) – Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks, but excluding Payments Banks). Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs). Which loans are covered under the directions? The directions shall apply to all loans offered by an RE for the purpose of consumption or income generation (including farm credit) where eligible gold or silver collateral is accepted as a collateral security. What is eligible collateral? Eligible collateral means the collateral of jewellery, ornaments or coins made of gold or silver. A lender shall not grant any ad...
Post a Comment
Read more

Investments in Debt Instruments by Non-residents

Reserve Bank of India (RBI) has issued directions on investments in debt instruments by non-residents. What are the channels for investments in debt instruments by non-residents? General Route – for investment in Government securities and corporate debt securities by Foreign Portfolio Investors (FPIs) subject to specified investment limits and macro-prudential limits. Voluntary Retention Route (VRR) – for investments in Government securities and corporate debt securities, free of certain macro-prudential limits applicable to FPI investments in debt markets under the General Route, by FPIs that commit to remain invested for a stipulated retention period. Fully Accessible Route (FAR) – for investments by non-residents in certain specified categories of Central Government securities (‘specified securities’) without any restriction. Scheme for Trading and Settlement of Sovereign Green Bonds (SGrBs) issued by the Central Government by eligible foreign investors in the International Finan...
Post a Comment
Read more

All about RBI Integrated Ombudsman Scheme, 2021

Filed a complaint against a bank / financial institution but haven’t received a reply for more 30 days? Or received a reply but not satisfied with the resolution offered by the bank / financial institution? Or the complaint was rejected by the bank / financial institution? You can approach RBI Ombudsman under the RBI Integrated Ombudsman Scheme, 2021. What is RBI Integrated Ombudsman Scheme (RBI-IOS), 2021? RBI-IOS was launched on November 12, 2021, by integrating the existing 3 Ombudsman schemes of RBI. RBI-IOS adopts ‘One Nation One Ombudsman’ approach by making the RBI Ombudsman mechanism jurisdiction neutral. It provides cost-free redress of customer complaints involving deficiency in services rendered by entities regulated by RBI. Which schemes are integrated in RBI-IOS? RBI-IOS integrates following existing schemes of RBI – Schemes Powers derived from Entities covered Banking Ombudsman Scheme, 2006 Section 35A of BR Act, 1949 S...
Post a Comment
Read more

Continuous Clearing and Settlement on Realisation in Cheque Truncation System (CTS)

Reserve Bank of India (RBI) has issued direction on continuous clearing and settlement on realisation in Cheque Truncation System (CTS). What is Cheque Truncation System (CTS)? Cheque Truncation System (CTS) involves halting the physical movement of the cheque and its replacement by images of the instrument and the corresponding data contained in the MICR line.  In CTS, 3 images are taken of each cheque – front Gray Scale, front Black & White and back Black & White. MICR (Magnetic Ink Character Recognition) is a 9-digit code printed at the bottom of cheques using magnetic ink – first 3 digits indicate City Code, middle 3 digits indicate Bank Code and the last 3 digits indicate Bank Branch Code. Only CTS-2010 standards compliant instruments can be presented for clearing through CTS. The presenting banks which truncates the cheques need to preserve the physical instruments for 10 years. From when will the continuous clearing and settlement on realisation in CTS be implemented...
Post a Comment
Read more