RBI curtails quantum of declaration of dividends by banks

Reserve Bank of India while allowing banks to pay dividends on equity shares, reviewed the dividend declaration norms for the year ended March 31, 2021. “In view of the continuing uncertainty caused by the ongoing second wave of COVID-19 in the country, it is crucial that banks remain resilient and proactively raise and conserve capital as a bulwark against unexpected losses,” said RBI.

In terms of partial modification of the instructions to RBI circular DBOD.NO.BP.BC.88/21.02.067/2004-05 dated May 4, 2005, the Central Bank today said that banks may pay the dividend on equity shares from the profits for the financial year ended March 31, 2021, subject to the quantum of dividend being not more than fifty percent of the amount determined as per the dividend payout ratio prescribed by the banking regulator. Cooperative banks shall be however permitted to pay the dividend on equity shares from the profits of the financial year ended March 31, 2021, as per the extant instructions

The declaration of dividend by a bank is subject to compliance with provisions of Sections 15 and 17 of the Banking Regulation Act, 1949. Under section 15 BR act, no banking company shall pay any dividend on its shares until all its capitalized expenses have been completely written off. Section 17 provides that every banking company incorporated in India shall transfer to the reserve fund a sum equivalent to not less than twenty percent of each year’s profit before declaring dividends to shareholders. Further, the dividend-declaring banks should comply with the prevailing regulations/ guidelines issued by RBI, including creating adequate provisions for impairment of assets and staff retirement benefits, transfer of profits to Statutory Reserves, etc. The proposed dividend should be payable only out of the current year’s profit.

The circular dated May 4, 2005, allowed banks to declare dividends to their equity shareholders provided they should have CRAR of at least 9% for the preceding two completed years and the accounting year for which it proposes to declare dividend and Net NPA should be less than 7%. In case any bank does not meet the above CRAR norm but is having a CRAR of at least 9 % for the accounting year for which it proposes to declare dividends, it would be eligible to declare dividends provided its Net NPA ratio is less than 5%.