NEW DELHI: The banking regulator has proposed to make more stringent the conditions for banks to be able to declare dividend payments. The Reserve Bank of India (RBI) on Tuesday released draft guidelines in which it has proposed that a bank should have net non-performing assets (NPAs) of less than 6% in the financial year for which the dividend has been proposed. Earlier, banks with less than 7% net NPA could give dividends to its shareholders.
The RBI has increased the capital adequacy requirement for small finance banks (SFBs) and payment banks. It proposes minimum capital requirement for commercial banks, local area banks and regional rural banks to be at 9%, while for those SFBs and payment banks it is 15%. Apart from the overall capital requirements, banks will have to stick to minimum Tier 1 capital norms. For example, commercial banks must have 7% minimum tier 1 capital to be able to declare dividends.
Meanwhile, the regulator has proposed hiking maximum dividend payout ratio to 50% from existing 40%. A bank with no net NPA can pay 50% dividend to its shareholders, 40% if net NPA is over 0 and less than 1% and 35% for banks with net NPAs more than or equal to 1% but less than 2%. A bank with net NPA of more than or equal to 2% but less than 4% can pay up to 25% dividend and 15% if the net NPA is more than or equal to 4% but less than 6%.
Dividend payout ratio is the ratio between the amount of the dividend payable in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed. According to the guidelines, the proposed dividend payable will 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 will be reduced from net profit while determining the Dividend Payout Ratio.
The guidelines apply to foreign banks for being able to remit profits to their foreign headquarters. Explaining the rationale for revision of the dividend guidelines, the RBI said that these guidelines have been reviewed in the light of implementation of Basel III standards, the revision of the prompt corrective action (PCA) framework, and the introduction of differentiated banks. These guidelines were last reviewed in 2006.
On a tight leash
50% maximum dividends payout allowed to banks from existing 40% on fulfillment of revised criteria
The net NPA ratio, for the financial year for which the dividend is proposed, should be less than 6% against the existing 7%
Commercial banks and RRBs should maintain 9% minimum capital adequacy each of
the last three financial years
The minimum capital adequacy ratio for small finance banks and payment banks should be 15% to be eligible for declaring dividends
These guidelines shall be effective for declaration of dividends for the 2024-25 and onwards