The Reserve Bank of India (RBI) on January 2 issued draft norms on declaration of dividend by banks spelling out the eligibility criteria and guidelines on board oversight.
As per this, 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.
Also, the net NPA ratio, for the financial year for which the dividend is proposed, shall be less than six per cent, the RBI said.
According to the RBI release, the earlier 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.
Comments on the draft circular are invited from banks, market participants, and other stakeholders by January 31, 2024, the RBI said.
The circular is applicable to all commercial banks (including Regional Rural Banks, Local Area Banks, Small Finance Banks, and Payments Banks).
Currently, banks declare dividend and foreign bank branches remit profit, subject to compliance with the guidelines issued on May 4, 2005 and November 6, 2003, respectively.
There have been significant changes in the regulatory framework governing banks post issuance of these guidelines, the RBI said.
"Some of these developments also have implications for the guidelines on declaration of dividend and remittance of profits. In view of this, the Reserve Bank has undertaken a comprehensive review of the extant regulations on declaration of dividend and remittance of profits," the RBI added.
As per the draft circular, banks eligible to declare dividend shall 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, RBI said in a 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.
On the remittances front, circular said foreign bank operating in India in branch mode, meeting eligibility criteria may remit net profit/surplus (net of tax) of a quarter or year, earned in the normal course of business arising out of 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.
Banks declaring dividend or remitting profits have to report details to declaring dividend or remitting profits.
The RBI said that the guidelines shall be effective for declaration of dividends for the FY 2024-25 and onwards.
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