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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


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