Dividend Update: RBI releases new draft norms for bank stocks paying dividends

Synopsis: RBI proposes capping bank dividends at 75% of adjusted PAT, tightening eligibility via capital, profitability, and NPA checks; norms apply to commercial banks from FY27, excluding small banks.

The Reserve Bank of India has released draft guidelines on dividend payouts and remittance of profits, seeking to strengthen prudential discipline while ensuring banks maintain adequate capital buffers. The norms are proposed to take effect from FY27.

Under the draft framework, dividend payouts will be capped and linked to adjusted profitability, asset quality, and regulatory capital levels, with boards required to factor in NPAs, audit observations, and long-term growth considerations before declaring dividends.

New Draft Norms

Dividend Policy: Under the proposed norms, eligible banks can distribute up to 75 percent of their profit after tax (PAT) as dividends. This includes both interim and final dividends on equity shares, while payments on perpetual non-cumulative preference shares are excluded. The move aims to balance rewarding shareholders and maintaining adequate capital buffers.

Profit After Tax: For a bank to declare any dividend, it must have a positive adjusted Net Profit for the financial year for which the dividend is proposed. Similarly, foreign bank branches operating in India must have a positive PAT to remit profits to their head offices.

The RBI has tightened what counts as profit to ensure banks aren’t paying out money they haven’t actually earned in cash. So, when calculating PAT for dividends, banks must exclude any exceptional or extraordinary income, as well as profits identified as overstated by statutory auditors. Dividends or profit payouts cannot come from unrealised gains on Level 3 financial instruments, certain provision reversals, or unrealised gains from loan transfers, following RBI’s existing guidelines.

NPA & other considerations:  Before approving any dividend, the Board of Directors must specifically consider NPA divergence. This refers to any difference between the NPA levels reported by the bank and those found during an RBI inspection. The Board must also review the trend of these NPAs to ensure the bank’s long-term financial health is not at risk.

Auditors’ reports act as a “reality check,” requiring banks to adjust any inflated profits before paying dividends. The capital position serves as a safety buffer to maintain stability and comply with RBI norms. Boards must also retain enough profits to fund future growth instead of distributing all earnings, for the sake of their long-term plans.

Types of banks included in the draft: These norms apply to all commercial banks, including SBI and foreign banks operating in branch mode. However, they do not apply to Small Finance Banks (SFBs), Payment Banks, Local Area Banks (LABs), or Regional Rural Banks (RRBs).

In summary, these draft norms ensure that banks prioritise financial stability over shareholder payouts by linking dividends directly to health indicators like NPAs. To ensure the framework is robust, the RBI has placed these directions in the public domain for public comments and stakeholder feedback until February 5, 2026. This consultative approach allows the final policy to be refined before it officially takes effect in FY27, giving banks a clear window to align their capital and asset quality with the new standards.

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