RBI issues draft norms on dividend declaration by banks

The Reserve Bank of India (RBI) on Tuesday issued draft norms on declaring bank dividends, laying down eligibility criteria and guidelines on board oversight. The bank’s board or management should consider whether there is any divergence in classification and provisioning for non performing assets (NPAs), current capital position and long term growth plans, before considering the proposal for declaration of dividend or remittance of profits.

RBI said banks need to meet the applicable regulatory capital requirement for each of the last three financial years, including the financial year for which the dividend is proposed. The net NPA ratio for the financial year for which the dividend is proposed, should be less than 6%, it said. The central bank said the existing guidelines were reviewed in the light of implementation of Basel III standards, revision of the prompt corrective action (PCA) framework, and the introduction of differentiated banks.

The draft circular also said that banks eligible to declare dividend should pay dividend only on equity shares. In case the net profit for the relevant period includes any exceptional and/or extra ordinary profits/ income, or if the financial statements are qualified (including ‘emphasis of matter’) by the statutory auditor that indicates an overstatement of net profit, the same shall be reduced from net profit while determining the dividend payout ratio, said RBI in the draft circular.

Dividend payout ratio is the ratio between the amount of the dividend payable in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed. The circular also said that the foreign bank operating in India in branch mode, meeting eligibility criteria may remit net profit/surplus of a quarter or year from its Indian operations, without prior approval of the Reserve Bank, provided that the accounts of the bank are audited and in the event of excess remittance, the head office of that foreign bank immediately makes good the shortfall.

Comments on the draft circular are invited from banks, market participants, and other stakeholders by 31 January, the RBI said. Livemint tops charts as the fastest growing news website in the world to know more. Unlock a world of Benefits! From insightful newsletters to real time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away!.