RBI says, banks quantum of dividend should not be more than 50% amount determined as per the dividend payout ratio

The Reserve Bank of India (RBI) has curbed banks' dividend-paying ability for the financial year 2020-21 (FY21) ended March 31, 2021. It said, commercial banks may pay a dividend on equity shares from the profits for the financial year ended March 31, 2021, subject to the quantum of dividend being not more than 50 per cent of the amount determined as per the dividend payout ratio prescribed.

In its release RBI said, in view of the continuing uncertainty caused by the ongoing second wave of COVID-19 in the country, it is crucial that banks remain resilient and proactively raise and conserve capital as a bulwark against unexpected losses.

Therefore, while allowing banks to pay the dividend on equity shares, it has been decided to review the dividend declaration norms for the year ended March 31, 2021.

Cooperative banks shall be permitted to pay the dividend on equity shares from the profits of the financial year ended March 31, 2021, as per the extant instructions.

RBI said, All banks shall continue to meet the applicable minimum regulatory capital requirements after dividend payment. While declaring a dividend on equity shares, it shall be the responsibility of the Board of Directors to inter-alia consider the current and projected capital position of the bank vis-à-vis the applicable capital requirements and the adequacy of provisions, taking into account the economic environment and the outlook for profitability.

RBI way back on May 4, 2005, had come out with standardized norms for dividend declaration. It said, other instructions in the circular dated May 4, 2005, shall remain unchanged. Eligibility criteria for declaration of dividend:

Only those banks, which comply with the following minimum prudential requirements, would be eligible to declare dividends. The bank should have:

1)CRAR of at least 9 per cent for the preceding two completed years and the accounting year for which it proposes to declare a dividend.

2) Net NPA less than 7 per cent.

In case any bank does not meet the above CRAR norm but is having a CRAR of at least 9 per cent for the accounting year for which it proposes to declare a dividend, it would be eligible to declare dividend provided its Net NPA ratio is less than 5 per cent.

1) The bank should comply with the provisions of Sections 15 and 17 of the Banking Regulation Act, 1949.

2) The bank should comply with the prevailing regulations/ guidelines issued by RBI, including creating adequate provisions for impairment of assets and staff retirement benefits, transfer of profits to Statutory Reserves etc.

3) The proposed dividend should be payable out of the current year's profit.

4) The Reserve Bank should not have placed any explicit restrictions on the bank for the declaration of dividends.