RBI proposes raising bank dividend payout cap to 75% of net profit

The central bank also proposed that bank boards should comprehensively assess asset quality trends, provisioning gaps, capital adequacy and long-term growth plans before approving any dividend payout.

In a draft set of prudential norms on declaration of dividends and remittance of profits, the central bank has laid down a graded structure for dividend payments based on banks' common equity tier-1 (CET1) capital levels and invited comments from stakeholders by February 5.

The draft directions, which will come into effect from the financial year 2026-27, will apply to all commercial banks, including the State Bank of India and foreign banks operating in branch mode, but will exclude small finance banks, payments banks, regional rural banks and local area banks.

Under the proposed framework, banks incorporated in India that meet the prescribed eligibility criteria may declare dividends up to 75 per cent of their profit after tax (PAT), subject to capital-linked ceilings. The actual payout will depend on a bank's CET1 ratio as at the end of the previous financial year.

The RBI has introduced a ten-bucket structure under which banks with higher capital buffers will be permitted to distribute a larger proportion of adjusted profits.

Adjusted PAT for the purpose of dividend calculation will be arrived at after deducting net non-performing assets (NPAs) as on March 31 of the relevant year. The draft also makes it clear that dividends cannot be paid out of exceptional or extraordinary income, unrealised gains from fair valuation, or profits arising from reversal of excess provisions unless permitted under existing RBI norms.

Bank boards will be required to explicitly consider supervisory observations on divergence in asset classification and provisioning.

Foreign banks operating in India in branch mode will be allowed to remit profits to their head offices without prior RBI approval, provided they meet eligibility criteria, their accounts are audited and capital requirements remain compliant after remittance.

The Central Bank has retained the power to restrict dividend payments or profit remittances in cases of regulatory non-compliance. Banks failing to meet eligibility norms will not be granted any special dispensation.

The draft directions will replace existing circulars governing dividend declarations by commercial banks. Non-compliance with the proposed norms could attract supervisory or enforcement action by the central bank.

The RBI said the proposed framework aims to strike a balance between rewarding shareholders and ensuring that banks conserve capital to support resilience and sustainable growth, particularly in light of evolving risk profiles and supervisory expectations. (ANI)