The Reserve Bank of India recently 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 an NNPA ratio of up to 7 per cent to become eligible for the declaration of dividends.
The draft lays down directions that need to be followed by banks’ boards while considering proposals of dividend payouts, which include consideration of divergence in classification and provisioning for NPAs as well.
“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.
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 payment 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 RBI 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 the declaration of dividend”.
The new proposal also covers foreign banks, who, since 2003, have been allowed to remit profits and dividends to their head offices without the RBI’s approval.
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 from Indian operations without the central bank’s prior approval.
Overseas lenders who meet the new rules for capital requirements and bad loans can still remit part of their profits from Indian operations without prior approval, provided their accounts are audited, RBI said.
In case of any excess remittance, the head office of the foreign bank has to “immediately make good the shortfall,” according to the rules.
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.
The guidelines have been reviewed in the light of the implementation of Basel III standards, the revision of the prompt corrective action (PCA) framework, and the introduction of differentiated banks, the RBI said.
The rules will be effective for dividend declarations from the financial year starting April 2024 onwards, and RBI has sought comments on the proposed regulations by Jan. 31, according to the statement.
(With agency inputs)
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