Applicability and coverage
- The Directions apply to:
- All commercial banks (including State Bank of India and other banking companies), and
- Foreign banks operating in India in branch mode.
- They do not cover small finance banks, payments banks, regional rural banks and local area banks, which are proposed to be governed under separate but broadly aligned norms.
Core prudential eligibility conditions
Before declaring any dividend or remitting profits, a bank must satisfy all of the following prudential conditions:
- Capital adequacy compliance
- The bank must be compliant with minimum regulatory capital requirements (including capital conservation buffer and D‑SIB buffers, wherever applicable) as at the end of the previous financial year.
- Post‑distribution, capital ratios must not fall below the prescribed minima; the Board must ensure that the proposed payout does not erode regulatory capital and buffers.
- Profitability conditions
- Indian‑incorporated banks must have a positive adjusted Profit After Tax (PAT) for the year for which dividend is proposed, generally computed as PAT net of specific regulatory deductions such as net NPAs and certain exceptional items.
- Foreign bank branches must have positive PAT for the period for which profits are proposed to be remitted to the head office.
- Supervisory and compliance posture
- The bank must not be under any explicit restriction from RBI or any other authority on dividend declaration or profit remittance.
- The Board must duly consider supervisory observations, including divergences in asset classification and provisioning, while recommending dividends.
Ceiling on payout and CET1‑linked matrix
The Directions propose a graded matrix that caps the maximum dividend payout ratio at 75% of PAT, with the actual permissible percentage linked to the bank’s Common Equity Tier‑1 (CET1) ratio.
- Overall cap
- Aggregate dividend on equity shares in any financial year shall not exceed 75% of profit after tax for that year.
- CET1‑linked gradation
- Higher CET1 ratios permit higher payout bands, up to the 75% cap; weaker CET1 levels attract lower permissible payout ratios, with no dividend allowed once CET1 falls below specified thresholds.
- D‑SIB overlay
- Domestic systemically important banks must also factor in additional CET1 buffers over and above the general minima before considering dividend distributions.
The precise grid (CET1 ranges versus maximum payout ratios) is illustrated in Annexes to the draft Directions and is intended to embed a clear capital‑sensitivity in payout decisions.
Treatment of profits, exclusions and deductions
In computing profits eligible for dividend or remittance, banks must apply specific regulatory adjustments to ensure that only high‑quality, realised earnings are distributed.
- Exclusions from distributable profit
- Exceptional or one‑off income that is not expected to recur, such as large non‑operating gains.
- Profits that, in the auditors’ or supervisors’ judgment, may be overstated or not prudently recognisable.
- Unrealised gains, including valuation gains on complex financial instruments, derivatives or marked‑to‑market portfolios that are not actually realised in cash.
- Specific deductions (illustrative)
- Net NPAs or similar asset‑quality adjustments, as prescribed in the Directions and illustrated in Annex I*
- Reversal of provisions or profits arising from credit risk transfer transactions and government‑guarantee backed exposures to be treated in line with RBI’s existing credit risk transfer guidelines.
These conditions are designed to prevent the distribution of volatile or fragile earnings and to prioritise internal capital generation.
Remittance of profits by foreign bank branches
Foreign banks operating in India in branch mode are allowed to remit profits to their head offices without prior RBI approval, subject to prudential conditions broadly mirroring those for dividends.
- Eligibility prerequisites
- Positive PAT for the period for which profits are to be remitted, after regulatory deductions.
- Full compliance with applicable capital requirements (including branch‑level capital adequacy norms) as at the end of the previous financial year and on a post‑remittance basis.
- No explicit supervisory restrictions on profit remittance and satisfactory compliance history.
- Additional safeguards
- Profits remitted must arise from normal banking business in India and be net of Indian taxes.
- Accounts must be duly audited; any excess remittance beyond permitted levels must be promptly returned by the head office.
Governance, reporting and supervisory powers
The Directions reinforce the role of the Board and senior management in ensuring that dividend and remittance decisions remain consistent with long‑term capital planning and risk profile.
- Board responsibilities
- Assess internal capital adequacy, growth strategy, stress test outcomes and asset‑quality trends before recommending dividends or remittances.
- Explicitly record consideration of supervisory findings, divergence reports and any early‑warning signals in Board deliberations.
- Reporting framework
- Banks must submit prescribed returns to RBI after declaration of dividend and/or remittance of profits, capturing payout ratios, capital position pre‑ and post‑distribution and relevant computations.
- Restrictions and penal consequences
- RBI retains discretion to restrict or prohibit dividend payments or profit remittances where a bank is found non‑compliant with regulatory requirements or prudential expectations, notwithstanding otherwise meeting numerical criteria.
- Non‑compliance with these Directions can attract supervisory and penal action under applicable provisions of the RBI Act and Banking Regulation Act, in addition to restrictions on future payouts.
Implications for banks and stakeholders
- For banks, the Directions hard‑wire capital‑sensitive payout discipline, incentivising the maintenance of strong CET1 buffers and high‑quality earnings streams.
- For shareholders and investors, the framework offers greater transparency and predictability in dividend policy, but also signals that capital preservation will override distribution, particularly during stress.
- For foreign banks, streamlined but conditional profit remittance aligns cross‑border capital flows with prudential considerations in the Indian jurisdiction.
Annex I
Illustrations of calculation of maximum permissible dividend (provided by RBI)
Note: The calculations are for illustrative purposes only to aid banks in their understanding of the Directions.
Illustration 1: Computation of maximum permissible dividend for FY 20X1-X2
| Particulars | Amount ₹ Crore) | |
| Net profit (PAT) for FY 20X1-X2 (A) | 17,000 | |
| Net NPAs as on March 31, 20X2 (B) | 6,500 | |
| Adjusted PAT, i.e., (C) = (A) – (B) | 10,500 | |
| CET 1 ratio capital as on March 31, 20X1 (D) | 11.72% | |
| The CET1 ratio falls in bucket B3 | ||
| 75% of PAT(E) | 12,750 | |
| Max payable as per Table 1 (30% of 10,500) (F) | 3,150 | |
| Maximum Eligible Dividend (i.e., Lower of E or F) | 3,150 | |
| Maximum Eligible Dividend as percentage of PAT | 18.52% | |
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