RBI/2004-05/451
DBOD.NO.BP.BC. 88 / 21.02.067 / 2004-05
May 04, 2005
All scheduled commercial banks (except RRBs)
Dear Sir,
Declaration of dividends by banks
The policy approach adopted by the Reserve Bank
with regard to payment of dividends by banks was reviewed in consultation with
the Standing Technical Advisory Committee on Financial Regulation and the regulatory
focus was shifted from the ‘quantum of dividend’ to the ‘dividend payout ratio’
in terms of our guidelines issued vide our circular DBOD.
No. BC.80 / 21.02.67 / 2003-04 dated April 23, 2004. These guidelines permitted
banks to declare dividends subject to a ceiling of 33.33% on the dividend payout
ratio, without obtaining the prior approval of RBI, subject to the fulfilment
of the laid down criteria.
2. On
the basis of the experience gained, it has been decided to grant general
permission to banks to declare dividends, subject to compliance with the
guidelines laid down below:
3. Eligibility criteria for declaration
of dividend
Only those banks, which comply with the following
minimum prudential requirements, would be eligible to declare dividends:
i. The bank should have:
CRAR of at least 9 % for preceding
two completed years and the accounting year for which it proposes to declare
dividend.
Net NPA less than 7 %.
In case any bank does not meet the above CRAR
norm, but is having a CRAR of at least 9 % for the accounting year for which
it proposes to declare dividend, it would be eligible to declare dividend provided
its Net NPA ratio is less than 5%.
i. The bank should comply with the provisions
of Sections 15 and 17 of the Banking Regulation Act, 1949.
ii. 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.
iii. The proposed dividend should be payable
out of the current year's profit.
iv. The Reserve Bank should not have placed
any explicit restrictions on the bank for declaration of dividends.
In case any bank does not meet the above eligibility
criteria no special dispensation shall be available from the Reserve Bank.
4. Quantum of dividend payable
Banks, which fulfil the eligibility criteria
set out at paragraph 3 above, may declare and pay dividends, subject
to the following:
i. The dividend payout ratio shall
not exceed 40 % and shall be as per the matrix furnished in Annex
1.
[Dividend payout ratio shall be calculated
as a percentage of ‘dividend payable in a year’ (excluding dividend tax) to
‘net profit during the year’.]
ii. In case the profit for the relevant
period includes any extra-ordinary profits/ income, the payout ratio shall
be computed after excluding such extra-ordinary items for reckoning compliance
with the prudential payout ratio.
iii. The financial statements pertaining
to the financial year for which the bank is declaring a dividend should be
free of any qualifications by the statutory auditors, which have an adverse
bearing on the profit during that year. In case of any qualification to that
effect, the net profit should be suitably adjusted while computing the dividend
payout ratio.
iv. For 2004-05 if the Investment Fluctuation
Reserve is less than 4% of securities included in the HFT & AFS categories,
the dividend payout ratio shall be computed with respect to the Adjusted Net
Profit.
[Adjusted Net Profit = Net Profit – ({4%
of (HFT + AFS)} – IFR)]
The Reserve Bank will not entertain any application
for a higher dividend payout ratio than the one for which the banks qualify.
5. Board Oversight
A copy of these guidelines may be placed before
the Board at its next meeting. Banks’ Boards should take into account the interests
of all stake holders and the following aspects while deciding on the
proposals for declaring dividend:
a. the interim dividend paid,
b. the Annual Financial Inspection findings
of the Reserve Bank with regard to divergence in identification of NPAs, shortfall
in provisioning, etc.,
c. the auditors’ qualifications pertaining
to the statement of accounts
d. the Basel II capital requirements,
and
e. the bank’s long term growth plans.
6. Reporting System
All banks declaring dividends should report details of dividend
declared during the accounting year as per the proforma furnished in Annex
2. The report should be furnished within a fortnight after declaration of
dividends.
7. General
The above guidelines will be applicable to the
dividends declared for the accounting year ended March 31, 2005 onwards. In
case any bank violates the above guidelines, the violation would be viewed very
seriously and such violation would attract penal action under Section 46 of
the Banking Regulation Act, 1949.
8. Please acknowledge receipt.
Yours faithfully,
(Anand Sinha)
Chief General Manager-in-Charge
ANNEX 1
Matrix of Criteria for maximum permissible
range of Dividend Payout Ratio
|
Category
|
CRAR
|
Net NPA Ratio
|
|
Zero
|
More than zero but less than 3%
|
From 3 % to less than 5%
|
From 5% to less than 7 %
|
|
Range of Dividend Payout Ratio
|
|
A
|
11% or more for each of the last 3 years
|
Up to 40
|
Up to 35
|
Up to 25
|
Up to 15
|
|
B
|
10% or more for each of the last 3 years
|
Up to 35
|
Up to 30
|
Up to 20
|
Up to 10
|
|
C
|
9% or more for each of the last 3 years
|
Up to 30
|
Up to 25
|
Up to 15
|
Up to 5
|
|
D
|
9% or more in the Current year
|
Up to 10
|
Up to 5
|
Nil
|
Notes
1. Banks should have a CRAR of at
least 9% for preceding two completed years and the accounting year for which
it proposes to declare dividend and Net NPA less than 7% to be
eligible to declare dividends. In case any bank does not meet the above CRAR
norm, but is having a CRAR of at least 9 % for the accounting year for which
it proposes to declare dividend, it would be eligible to declare dividend provided
its Net NPA ratio is less than 5%.
2. For 2004-05, if the Investment Fluctuation
Reserve is less than 4 % of securities included in HFT & AFS categories,
Dividend Payout Ratio will be computed with respect to the Adjusted Net Profit
Adjusted Net Profit = Net Profit – [ {4% of (HFT+ AFS)} – IFR
]
Illustrations
|
Bank
|
CRAR (%)
|
Net NPA ratio (%) as on March 31, 2005
|
Category
|
Maximum dividend pay-out ratio (%) for
which the bank would qualify
|
| |
2004-05
|
2003-04
|
2002-03
|
|
|
|
|
V
|
12
|
11
|
11
|
2.3
|
A
|
Up to 35
|
|
W
|
12
|
10
|
11
|
3.8
|
B
|
Up to 20
|
|
X
|
11
|
9
|
10
|
6.2
|
C
|
Up to 5
|
|
Y
|
9
|
8
|
10
|
4.2
|
D
|
Up to 5
|
|
Z
|
12
|
11
|
12
|
zero
|
A
|
Up to 40
|
ANNEX 2
Reporting format for banks declaring dividend
Details of dividend declared during the financial
year beginning on April 1, 20__
Name of the Bank – _________
|
Accounting period *
|
Net profit for the accounting period (Rs. in crore)
|
Rate of dividend
|
Amount of dividend (excluding dividend tax) (Rs. in
Crore)
|
Pay out ratio
|
|
1
|
2
|
3
|
4
|
5
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
* quarter or half year or year ended ----- as the case may be