The Reserve Bank of India (RBI) on Tuesday floated a draft circular proposing to tighten dividend payout guidelines for domestic and overseas banks operating in India.
The proposal says banks with net non-performing asset ratio (NNPA)ofABOVE 6% and capital adequacy ratio (CRAR)ofbelow 11.5% cannot declare dividends. The regulator has sought public feedback on the proposed norms by January 31 and the circular will be implemented from April 2024 onwards.
“These 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. Accordingly, banks should comply with the following guidelines for declaration of dividends or remittance of profit,” the RBI said.
Data compiled by FE showed that all large lenders in India fulfil the minimum CRAR requirement of 11.5% and NNPA ratio of below 6% as of September 30.
RBI’s circular further stated that banks must compute dividends basis the “dividend payout ratio” which essentially is the ratio between the amount of the dividend payable in a year and the net profit for the financial year for which the dividend is proposed. The proposed dividend payable shall include dividend on equity shares only.
While lenders with zero NNPA will be allowed to offer 50% maximum dividend payout ratio to their promoters, those with 1%-2% NNPA ratio can offer a maximum of 35%. Banks with 4%-6% NNPA levels are allowed to extend a maximum dividend payout ratio of 15%. “The regulator will not entertain any request for ad-hoc dispensation on declaration of dividend,” it said.
The circular added that 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.
Further, while considering the proposal for declaration of dividends or remittance of profits, the bank’s board or management must consider the divergence in classification and provisioning for NPAs, if any, including trends as observed under by RBI, current and projected capital position, and long-term growth plans of the bank.