The Reserve Bank of India has introduced new guidelines that make it tougher for banks to distribute dividends to shareholders.
Under the updated rules, banks will now be allowed to pay out a maximum of 75% of their net profit as dividends.
The move aims to ensure that banks maintain strong financial health and adequate capital reserves.
These changes will apply from financial year 2026–27 (FY27).
Until then, the existing rules on dividend declaration will continue to remain in place.
Changes in Profit Calculation Rules
One key change in the new guidelines relates to how banks calculate adjusted profit after tax (PAT).
Earlier, banks had to deduct 100% of their net non-performing assets (NPAs) when calculating adjusted PAT.
Under the new rule, only 50% of net NPAs will be deducted.
This relaxation could slightly improve the amount of adjusted profit available for dividend calculations.
However, the RBI rejected banks’ request to use the current year’s Common Equity Tier 1 (CET1) ratio instead of the previous year’s figure.
The central bank has decided to continue using the earlier financial year’s CET1 ratio for this purpose.
No Dividends from One-Time or Exceptional Income
The RBI has also made it clear that banks cannot pay dividends from exceptional or one-time profits.
Exceptional income refers to profits that are not part of regular business operations and may not happen again in the future.
According to the RBI, such income is non-recurring, so allowing dividends from it could give a misleading picture of a bank’s financial strength.
The central bank also said it is not practical to create a complete list of all types of exceptional income.
RBI Rejects Banks’ Request to Delay Rules
Some banks had asked the RBI to delay the implementation of these dividend rules until new guidelines on expected credit loss (ECL) are introduced.
However, the central bank rejected this request.
It clarified that dividend distribution and expected credit loss guidelines are separate issues and should not be linked.
Conditions Banks Must Meet Before Declaring Dividends
Under the new framework, banks must meet several conditions before they can announce dividends.
These include:
Meeting all regulatory capital requirements at the end of the previous financial year
Maintaining these capital requirements during the year in which the dividend is proposed
Ensuring that capital levels remain above the required limit even after paying dividends
Banks registered in India must also report a positive adjusted profit after tax for the period in which the dividend is proposed.
For foreign banks operating in India through branch offices, a positive net profit is required before dividends can be distributed.
The RBI has warned that failure to follow these rules could lead to supervisory or enforcement actions.
With these tighter norms, the central bank aims to ensure that banks remain financially stable while still rewarding shareholders responsibly.
