RBI Issues Prudential Norms on Dividend Declaration and Profit Remittance by Commercial Banks
The Reserve Bank of India (RBI) has issued the Commercial Banks – Prudential Norms on Declaration of Dividends and Remittance of Profit) Directions, 2025, under the powers of Section 35A of the Banking Regulation Act, 1949. These Directions aim to provide a structured framework for commercial banks regarding dividend declaration and the remittance of profits by foreign bank branches, ensuring financial stability, prudence, and transparency in banking operations.
Applicability and Scope
These Directions apply to commercial banks, including banking companies (excluding small finance banks, payment banks, regional rural banks, and local area banks), corresponding new banks, and the State Bank of India. The norms define key terms such as CRAR (Capital to Risk-Weighted Assets Ratio), dividend payout ratio, net non-performing asset (NNPA) ratio, and remittance of profits for foreign bank branches.
Dividend Declaration Norms
The Directions emphasize that a bank’s Board must consider stakeholders’ interests, interim dividends, inspection findings, auditors’ qualifications, regulatory capital requirements, and long-term growth plans before declaring dividends. Banks are eligible to declare dividends only if they meet minimum prudential requirements: a CRAR of at least 9% for the preceding two years and the current financial year, and an NNPA ratio below 7%. Exceptions are allowed under specific conditions for banks meeting CRAR norms only in the current year, subject to a lower NNPA ratio.
The maximum dividend payout ratio is governed by a matrix linking CRAR and NNPA ratios. For instance, banks with CRAR above 11% and NNPA below 3% can pay up to 40% dividend, while those with CRAR of 9% and NNPA between 5–7% may pay up to 5%. Dividends must be paid only from current year profits, excluding extraordinary income or unrealized gains from Level 3 financial instruments. Any deviation from the prescribed payout ratio requires no RBI approval.
Remittance of Profit by Foreign Bank Branches
Foreign banks operating in India can remit net profits to their head offices quarterly or yearly without RBI approval, provided their accounts are audited, statutory reserves are transferred, and profits do not include unrealized gains from Level 3 instruments. Any excess remittance must be rectified promptly. Quarterly remittance details must be reported to the RBI.
Repeal and Compliance
The 2025 Directions repeal all previous instructions on dividend declaration and profit remittance for commercial banks but preserve actions, approvals, or legal proceedings initiated under earlier guidelines. They are supplementary to other laws, and the RBI retains the authority to issue clarifications or interpretations to ensure proper compliance.
These Directions reinforce the RBI’s focus on prudence and transparency, ensuring banks maintain adequate capital buffers while balancing profitability and stakeholder interests in the financial ecosystem.
