Dividend payouts are now linked to a bank’s Common Equity Tier 1 (CET1) ratio; earlier, limits were tied to the capital-to-risk weighted assets ratio (CRAR) and the net non-performing advances (NPAs).
The final norms are also softer than the draft. Banks will deduct only 50% of net NPAs (post-provision) from profit after tax to compute the profit eligible for dividend. The draft had proposed deducting the entire net NPA to arrive at eligible profit.
The RBI guideline states that the maximum allowable payout is now 100% of adjusted PAT, subject to cap at 75% of reported PAT. Icra Ratings estimates that the actual dividend payout ratio is unlikely to rise materially. The directions take effect from April 1, 2027.
“The sector’s total dividend limit would increase significantly under the proposed norms compared to the current norms; however, this would be primarily contributed by the banks with stronger CET 1 buffers,” According to Sachin Sachdeva, vice-president, sector head – financial sector ratings. “Going ahead, ICRA estimates that majority of the scheduled commercial banks [10 out of 13 public sector banks (including IDBI) and 13 out of 19 private sector banks] are likely to witness increase in dividend payout limit under new norms.”
For foreign banks operating as branches, the RBI allowed remittance of post-tax profits from Indian operations without prior approval, provided accounts are audited and any excess remittance is returned. Such remittances cannot be made from extraordinary gains, auditor-flagged overstatements of profit.
Under the new framework, payout bands are calibrated to CET1 “buckets”, with distributions ranging from 0% to 100% of adjusted profit after tax depending on a bank’s end-FY CET1 ratio, while the aggregate dividend in any year cannot exceed 75% of reported PAT. Banks designated as systemically important will be assessed against a CET1 threshold that includes their D-SIB buffer, identified in the rules as “z”. D- SIB are Domestic Systemically Important Banks. To be eligible, lenders must have complied with regulatory capital requirements at the end of the previous financial year and remain compliant after the proposed payout; they must also post a positive adjusted PAT for the period and face no explicit supervisory curbs. Adjusted PAT is defined as PAT minus 50% of net NPAs as of March 31 for the relevant year.