MUMBAI: The Reserve Bank has come out with a draft framework on dividend pay by banks proposing to cap the pay-out at 75% of net profit.
The draft regulations, issued late Tuesday, suggest compliance with applicable regulatory capital norms at the end of the previous fiscal year and continued compliance in the year of the dividend pay-out with capital levels remaining above the regulatory thresholds even after the dividend payment.
Domestic banks must report positive adjusted net profit for the relevant period, while foreign banks operating in branch mode must have positive net income to remit profit to their head offices. In addition, banks must also not be subject to any explicit restrictions imposed by the RBI or any other authority to be eligible to pay dividend, the draft said.
For calculating net income, banks are required to exclude exceptional or extraordinary income and any overstated profits flagged by statutory auditors. Dividend or profit remittances cannot be funded from unrealised gains on fair valuation of level 3 financial instruments, or from certain provision reversals and unrealised gains linked to loan transfers, in line with existing RBI directions, the new draft said.
It can be noted that in 2023, the RBI undertook a review of the existing prudential norms governing dividend pay-outs and remittance of profits, including those applicable to foreign banks operating in branch mode. As part of this exercise, a draft of the revised framework was released for public comments on January 2, 2024.
Following stakeholder feedback and consultations, the RBI has now issued draft directions proposing a revised methodology for computing the maximum eligible dividend pay-out.
Foreign banks that meet the eligibility criteria may remit net profit earned from domestic operations without prior RBI approval, provided their accounts are audited. Any excess remittance must be promptly returned by the head office.
The RBI has retained the right to restrict dividend distribution or profit remittances in cases of non-compliance, with no special dispensation available if eligibility conditions are not met. Non-compliance with these directions may attract supervisory or enforcement action.