News: Reserve Bank of India (RBI) has issued Commercial Banks – Prudential Norms on Declaration of Dividend and Remittance of Profit) Directions 2026 to revise prudential norms for dividend declaration by commercial banks.
About Commercial Banks – Prudential Norms on Declaration of Dividend and Remittance of Profit) Directions 2026
- Come into effect: The new directions will come into effect from FY 2026–27 (FY27).
- CET1-linked dividend framework: As per new direction, dividend payouts are linked to Common Equity Tier-1 (CET1) capital ratios.
- The framework introduces 10 capital-ratio buckets to determine the maximum permissible dividend payout.
- Note: CET1 ratio compares a bank’s capital against its risk-weighted assets to determine its ability to withstand financial distress.
- Dividend limits: As per the new direction:
- Banks with CET1 ratio of 8% or below cannot declare dividends.
- Banks with CET1 above 20% may distribute up to 100% of adjusted Profit After Tax (PAT).
- However, total dividend payout cannot exceed 75% of PAT regardless of the CET1 bucket.
- Local Area Banks and Regional Rural Banks (RRBs) will be allowed to declare dividends up to 80 per cent of the PAT, subject to compliance with prudential conditions laid down by the RBI.
- Adjusted Profit After Tax (PAT): It introduces Adjusted PAT to reduce dividend eligibility for banks with higher levels of bad loans.
- Note: Adjusted PAT is calculated as net profit minus 50% of net Non-Performing Assets (NPAs) as on March 31 of the relevant financial year.
- Rules for systemically important banks: For Domestic Systemically Important Banks (D-SIBs), the D-SIB capital buffer is added to each bucket thresholds.
- Eligibility conditions for dividend declaration:
- Banks must meet regulatory capital requirements before and after dividend payment.
- They must have a positive adjusted PAT.
- They should not face any existing restrictions from RBI on distribution.
- Board oversight: The board of directors must consider divergence in asset classification and NPA provisioning, review the auditors’ report, and assess the current and projected capital position and long-term growth plans.
- Rules for foreign banks: Foreign banks operating in India through branches may remit net profits to their head offices without prior RBI approval if accounts are audited.
- However, exceptional income, overstated profits identified by auditors, and unrealised gains on level-3 financial instruments are excluded from remittable profits.
- Reporting and compliance: Banks must report dividend payments or profit remittances to RBI’s Department of Supervision within a fortnight of the declaration. Non-compliance may attract supervisory or enforcement action.
