The Reserve Bank of India (RBI) has taken a significant stride in shaping the landscape of dividend declarations by banks. In a recent development on January 2, the RBI released draft norms, offering a comprehensive framework outlining the eligibility criteria and guidelines for board oversight in the process.
Evolution of Guidelines
Previously, banks declared dividends and foreign bank branches remitted profits, adhering to guidelines issued on May 4, 2005, and November 6, 2003, respectively. However, the RBI has now revisited these norms in light of the implementation of Basel III standards, the revision of the prompt corrective action (PCA) framework, and the introduction of differentiated banks.
Eligibility Criteria Unveiled
The draft norms stipulate that banks intending to declare dividends must meet the regulatory capital requirement for each of the last three financial years, including the financial year for which the dividend is proposed. Additionally, the net Non-Performing Assets (NPA) ratio for the proposed financial year should be less than six percent.
Impact on Commercial Banks
The circular issued by the RBI extends its influence across all categories of commercial banks, encompassing Regional Rural Banks, Local Area Banks, Small Finance Banks, and Payments Banks.
Shaping Dividend Declarations
According to the draft circular, banks eligible to declare dividends are required to pay them exclusively on equity shares. Furthermore, if the net profit for the relevant period includes exceptional or extraordinary profits or income, or if the financial statements are qualified by the statutory auditor, indicating an overstatement of net profit, such amounts shall be deducted while determining the Dividend Payout Ratio.
Dividend Payout Ratio Defined
The Dividend Payout Ratio is defined as the ratio between the amount of 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.
Remittances Front
Shifting focus to remittances, the circular addresses foreign banks operating in India in branch mode. Those meeting eligibility criteria may remit the net profit or surplus (net of tax) of a quarter or year, earned in the normal course of business arising from Indian operations. This can be done without prior approval from the Reserve Bank, provided the bank’s accounts are audited. In the case of excess remittance, the head office of the foreign bank is required to promptly cover the shortfall.
Reporting Requirements
Banks engaging in dividend declarations or profit remittances are obligated to report detailed information in accordance with the guidelines set forth by the RBI.
Looking Ahead
The RBI emphasizes that these revised guidelines will be effective for dividend declarations for the fiscal year 2024-25 and beyond. The regulatory landscape governing banks has witnessed substantial changes since the issuance of the previous guidelines, prompting this comprehensive review and revision.
