RBI is planning to change rules for Banks to declare dividend, Check draft guidelines released by RBI

The Reserve Bank announced a proposal on Tuesday, suggesting a revision in dividend declaration norms for banks. The proposed change would allow banks with a net non-performing assets (NPAs) ratio of less than 6 per cent to declare dividends. The existing norms, last updated in 2005, require banks to maintain an NNPA ratio of up to 7 per cent for eligibility to declare dividends.
According to the draft guidelines on dividend declaration, the net NPA ratio, for the relevant financial year, should be less than six per cent. The proposed guidelines have undergone a review considering the implementation of Basel III standards, the revision of the prompt corrective action (PCA) framework, and the introduction of differentiated banks.
The Reserve Bank has suggested that the new guidelines should take effect from the financial year 2025 onwards. The draft provides directions for banks’ boards to follow while evaluating dividend payout proposals, including considerations on divergence in classification and provisioning for NPAs.
The draft circular sets out minimum total capital adequacy requirements for various types of banks. A commercial bank must have a minimum total capital adequacy of 11.5 per cent to be eligible for declaring dividends. For small finance banks and payment banks, the requirement is set at 15 per cent, while local area banks and regional rural banks need to maintain a minimum of 9 per cent.
In a departure from existing norms, the Reserve Bank has proposed an increase in the upper ceiling on the dividend payout ratio to 50 per cent (from the previous 40 per cent) if the net NPA is zero. The draft circular emphasizes that the Reserve Bank will not entertain requests for “ad-hoc dispensation on declaration of dividend.”
For foreign banks, the RBI proposes that they may remit net profit or surplus (net of tax) earned in a quarter or a year from Indian operations without prior approval. However, in the case of excess remittance, the foreign bank’s head office is required to promptly “make good the shortfall.”
The draft circular is open for public feedback and suggestions until January 31, according to the RBI.