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RBI Allows Dividend for Banks with Low NPAs

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By Rediff Money Desk, MUMBAI   Jan 02, 2024 18:56

Reserve Bank of India (RBI) proposes new guidelines for dividend declaration by banks, allowing those with net NPAs under 6% to declare dividends. The guidelines also revise dividend payout ratios and capital adequacy requirements.
RBI Allows Dividend for Banks with Low NPAs
Illustration: Dominic Xavier/Rediff.com
Mumbai, Jan 2 (PTI) The Reserve Bank on Tuesday proposed allowing banks having net non-performing assets (NPAs) ratio of less than 6 per cent to declare dividends.

As per the prevailing norms last updated in 2005, banks need to have a NNPA ratio of up to 7 per cent to become eligible for declaration of dividends.

"The net NPA ratio, for the financial year for which the dividend is proposed, shall be less than six per cent," the Reserve Bank said in the draft guidelines on dividend declaration.

The guidelines have been reviewed in the light of implementation of Basel III standards, the revision of the prompt corrective action (PCA) framework, and the introduction of differentiated banks, the RBI said.

The central bank has proposed that the new guidelines should come into effect from FY25 onwards.

The draft lays down directions need to be followed by banks' boards while considering proposals of dividend payouts, which include consideration on divergence in classification and provisioning for NPAs as well.

A commercial bank should have a minimum total capital adequacy of 11.5 per cent to be eligible for declaring dividend, while the same for a small finance bank and paytment banks has been set at 15 per cent, and 9 per cent for local area banks and regional rural banks, the draft circular said.

In what can be seen as a relaxation from the existing norms, the Reserve Bank has proposed increasing the upper ceiling on dividend payout ratio -- which is the ratio between the amount of the dividend payable in a year and the net profit -- to 50 per cent if the net NPA is zero from the earlier ceiling of 40 per cent.

The draft also made it clear that the Reserve Bank shall not entertain any request for "ad-hoc dispensation on declaration of dividend".

In the case of foreign banks, the RBI has proposed that they may remit net profit or surplus (net of tax) of a quarter or a year earned in from Indian operations without the central bank's prior approval.

However, in the event of excess remittance, the head office of that foreign bank should immediately "make good the shortfall", the draft added.

The public can respond to the draft circular with suggestions by January 31, the RBI said.
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