Guidelines on Treatment of Dividend Equalisation Fund (DEF) – Primary (Urban) Co-operative Banks (UCBs)
The Reserve Bank of India (RBI) has issued new guidelines regarding the treatment of the Dividend Equalisation Fund (DEF) for Primary (Urban) Co-operative Banks (UCBs). This follows the Master Circular DOR.CAP.REC.5/09.18.201/2024-25 dated April 01, 2024, on “Prudential Norms on Capital Adequacy – Primary (Urban) Co-operative Banks (UCBs)”, the Master Circular DoR.CRE.REC.71/07.10.002/2023-24 dated January 16, 2024, on “Exposure Norms and Statutory / Other Restrictions – UCBs”, and the circular UBD.BPD.(PCB).Cir.No.4/12.05.001/2012-13 dated July 05, 2012, on “Declaration of Dividend by the UCBs”.
It has come to the RBI’s attention that some UCBs have created the DEF through the appropriation of profits. This fund was intended to be used to pay dividends in years when profits were insufficient or the bank posted a net loss. However, the guidelines on “Declaration of Dividends by UCBs” dated July 05, 2012, prohibit the payment of dividends from previously accumulated profits or reserves. The guidelines mandate that dividends can only be paid from the net profit of the current year, after making all statutory and other provisions, and after full adjustment for accumulated losses.
Additionally, it has been observed that UCBs have been considering the balances in the DEF as part of Tier-II capital. To provide better treatment of these balances for regulatory capital purposes, the RBI has decided, as a one-time measure, to permit UCBs to transfer the balances in the DEF to general reserves/free reserves. The credit balances in general reserves/free reserves will qualify as Tier-I capital, in line with the guidelines of the Master Circular on capital adequacy.
UCBs are required to make suitable disclosures of such transfers in the ‘Notes on Accounts’ to the Balance Sheet, in accordance with the Reserve Bank of India (Financial Statements – Presentation and Disclosures) Directions, 2021, dated August 30, 2021. Furthermore, UCBs must comply with the provisions of applicable State/Central Co-operative Acts and bye-laws, as well as other applicable laws, statutes, and regulations.
This circular is applicable to all Primary (Urban) Co-operative Banks and is effective immediately. The implementation of these guidelines is crucial for ensuring better regulatory compliance and maintaining the financial health of UCBs.
By transferring DEF balances to general reserves/free reserves, UCBs can enhance their Tier-I capital, which is essential for their overall capital adequacy. This change will help UCBs in managing their capital more effectively, ensuring they meet the required regulatory standards. The RBI’s move is expected to strengthen the financial stability of UCBs and improve their ability to withstand financial challenges in the future.
