The Reserve Bank of India (RBI) has unveiled a set of draft regulations aimed at creating a stricter and more uniform framework for dividend distributions by banks. The central bank's move directly ties a bank's ability to pay dividends to its financial health, specifically its capital strength, asset quality, and profitability. This new prudential framework is slated to become effective from the financial year 2026-27 (FY27).
Key Eligibility Conditions for Dividend Declaration
According to the draft guidelines, a bank will only be permitted to declare an equity dividend, or remit profits in the case of foreign bank branches, if it satisfies a set of stringent eligibility criteria. These conditions are designed to ensure that payouts do not undermine a bank's stability.
The bank must be in full compliance with all minimum regulatory capital requirements and prescribed buffers, including the additional buffer for Domestic Systemically Important Banks (D-SIBs). This compliance must be met both at the end of the previous financial year and after accounting for the proposed dividend payout. Crucially, the bank's capital ratios must not fall below the regulatory minimums after the dividend is paid.
For banks incorporated in India, there is an additional filter. They must report a positive adjusted profit after tax for the financial year in which the dividend is proposed. This adjusted profit is calculated as the profit after tax minus the net non-performing assets (NPAs). Foreign banks operating in branch mode must report a positive profit after tax for the relevant period.
Uniform Framework and Strict Enforcement
The RBI's draft directions aim to establish a common set of rules that will govern all banking companies, corresponding new banks, the State Bank of India (SBI), and foreign banks operating in India in branch mode. However, the framework excludes small finance banks, local area banks, payments banks, and regional rural banks from its purview.
The central bank has made it clear that there will be no exceptions. If a bank fails to meet any of the stipulated conditions, it will be barred from declaring a dividend or remitting profits for that period. Furthermore, the RBI has explicitly stated that no special dispensation will be allowed. The regulator has also retained the right to impose additional restrictions on banks found to be non-compliant with laws or other regulatory guidelines.
Linking Payouts to Capital Strength
At the heart of the new framework is a direct link between a bank's dividend payout capacity and its core financial resilience. The draft rules introduce a graded structure based on a bank's Common Equity Tier 1 (CET1) ratio. This means that banks with stronger capital bases will have relatively more headroom to distribute profits, while those operating closer to the minimum thresholds will face tighter constraints.
This move by the RBI comes in the backdrop of a year where banks paid out substantial sums to shareholders. In the previous financial year, banks distributed over Rs 75,000 crore in dividends after booking record profits. The new framework seeks to ensure that such generous distributions are sustainable and do not come at the cost of long-term financial soundness.
The proposed regulations mark a significant shift towards a more standardized and risk-sensitive approach to profit distribution in the Indian banking sector, prioritizing stability alongside shareholder returns.
