Draft Circular for comments DOR.ACC.REC.No.##/21.02.067/2023-24 January 2, 2024 Madam/ Dear Sir, Declaration of dividend by banks and remittance of profits to Head Office by
foreign bank branches in India The Reserve Bank has granted general permission to all scheduled commercial banks [excluding regional rural banks (RRBs)] to declare dividends vide circular reference DBOD.NO.BP.BC.88/21.02.067/2004-05 dated May 4, 2005 on ‘Declaration of dividends by banks’. Similarly, foreign banks operating in India in the branch mode are permitted to remit profits to their head office without prior approval from the Reserve Bank pursuant to circular reference DBOD.No.IBS.BC.46/16.13.100/2003-04 dated November 6, 2003. 2. These guidelines have been reviewed in the light of implementation of Basel III standards, the revision of the prompt corrective action (PCA) framework, and the introduction of differentiated banks. Accordingly, banks should comply with the following guidelines for declaration of dividends or remittance of profit1. Board Oversight 3. While considering the proposal for declaration of dividends or remittance of profits, the Board of Directors or the bank's management2 should consider the following: -
The divergence in classification and provisioning for Non-Performing Assets (NPAs), including its trend, as observed under supervisory findings of the Reserve Bank or National Bank for Agriculture and Rural Development (for RRBs), as applicable. -
Qualifications and Emphasis of Matter in the Auditors’ Report to the financial statements. -
Current and projected capital position vis-à-vis applicable capital requirement; and -
Long term growth plans of the bank. Eligibility criteria 4. Banks should meet the following prudential requirements to be eligible to declare dividends or remit profits. | Table 1: Declaration of Dividend: Minimum Prudential Requirements | | Sr. No. | Parameter | Requirement | | i. | Capital Adequacy | Bank shall have met the applicable regulatory capital requirement3 (refer Annex I) for each of the last three4 financial years including the financial year for which the dividend is proposed. | | ii. | Net NPA | The net NPA ratio, for the financial year for which the dividend is proposed, shall be less than six per cent. | | iii. | Other Criteria | - The bank should comply with Sections 11(2)(b)(ii), 15, and 17(1) of the Banking Regulation Act, 1949, as applicable.
- The bank shall be compliant with the applicable laws, regulations/ guidelines issued by the Reserve Bank including, inter alia, creating adequate provisions for impairment of asset and employee benefits, transfer of profits to Statutory Reserves etc.
- The Reserve Bank should not have placed any explicit restrictions on the bank for declaration of dividends or remittance of profits.
| Quantum of Dividend Payable 5. Banks eligible to declare dividend as per paragraph 4 above, may pay dividend, subject to the following: i. The Dividend Payout Ratio is the ratio between the amount of the dividend payable5 in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed. ii. Proposed dividend payable shall include dividend on equity shares6 only. iii. In case the net profit for the relevant period includes any exceptional and/or extra-ordinary profits/ income, or if the financial statements are qualified (including ‘emphasis of matter’) by the statutory auditor that indicates an overstatement of net profit, the same shall be reduced from net profit while determining the Dividend Payout Ratio. iv. The ceilings on dividend payout ratios for banks eligible, as per paragraph 4 above, to declare dividend are as under: | Table 2: Ceilings on Dividend Payout Ratio | | Sr. No. | Net NPA Ratio7 | Maximum Dividend Payout Ratio (percentage) | | 1 | Zero | 50 | | 2 | More than zero but less than 1 per cent | 40 | | 3 | More than or equal to 1 per cent but less than 2 per cent | 35 | | 4 | More than or equal to 2 per cent but less than 4 per cent | 25 | | 5 | More than or equal to 4 per cent but less than 6 per cent | 15 | v. The Reserve Bank shall not entertain any request for ad-hoc dispensation on declaration of dividend. Remittance of profits to head office by foreign banks operating in India in the branch mode 6. A foreign bank operating in India in branch mode, that satisfies the eligibility criteria specified in paragraph 4, may remit net profit/surplus (net of tax) of a quarter or year, earned in the normal course of business arising out of its Indian operations, without prior approval of the Reserve Bank, provided that the accounts of the bank are audited and in the event of excess remittance, the head office of that foreign bank immediately makes good the shortfall. Reporting System 7. Banks declaring dividend or remitting profits to Head Office shall report details thereof as per the format prescribed in Annex 2. The report shall be furnished to the Department of Supervision of the Reserve Bank or NABARD (in case of RRBs) within a fortnight of declaration of dividend or remitting profits to Head Office. Applicability 8. This circular is applicable to all commercial banks (including Regional Rural Banks, Local Area Banks, Small Finance Banks, and Payments Banks). Effective Date 9. These guidelines shall be effective for declaration of dividends for the FY 2024-25 and onwards. Repeal 10. With the issuance of these guidelines, following circulars shall stand repealed. (Usha Janakiraman)
Chief General Manager
Annex 1 Annex 1: Applicable regulatory capital requirements as at the date of issuance of the circular The table below enumerates the applicable capital requirements for various categories of banks as applicable on the date of issuance of the circular. These are subject to change in future and therefore while declaring dividend, the requirements applicable to the period under consideration need to be considered. | Sl. No | Bank Category | Capital requirements | Reference | | 1. | Commercial Banks (excluding Regional Rural Banks, Local Area Banks, Small Finance Banks, and Payments Banks) | The minimum capital requirements are as under:
| Minimum capital requirements (in per cent) | | Common Equity Tier (CET) 1 | 5.5 | | Capital Conservation Buffer (CCB) (comprised of Common Equity) | 2.5 | | Minimum CET1 and CCB | 8 | | Minimum Tier 1 capital | 7 | | Minimum Total Capital | 9 | | Minimum Total Capital including CCB (CRAR) | 11.5 |
Further, Domestic Systemically Important Banks (D-SIBs), are also required to meet additional Common Equity Tier 1 (CET1) as applicable. | Circular DOR.CAP.REC.15/21.06.201/2023-24 dated May 12, 2023 on Basel III Capital Regulations. | | 2. | Small Finance Banks | The minimum capital requirements are as under:
| Minimum capital requirements (in per cent) | | Common Equity Tier (CET) 1 | 6 | | Minimum Tier 1 capital | 7.5 | | Minimum Total Capital (CRAR) | 15 | | Circular DBR.NBD.No.26/16.13.218 /2016-17 dated October 6, 2016 on Operating Guidelines for Small Finance Banks. | | 3. | Payments Banks | The minimum capital requirements are as under:
| Minimum capital requirements (in per cent) | | Common Equity Tier (CET) 1 | 6 | | Minimum Tier 1 capital | 7.5 | | Minimum Total Capital (CRAR) | 15 | | Circular DBR.NBD.No.25/16.13.218 /2016-17 dated October 6, 2016 on ‘Operating Guidelines for Payments Banks‘. | | 4. | Local Area Banks | Banks are required to maintain a minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9 per cent on an ongoing basis. | Reserve Bank of India (Prudential Norms on Capital Adequacy for Local Area Banks) Directions, 2021. | | 5. | Regional Rural Banks | RRBs are required to maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) of 9 per cent on an ongoing basis. | Circular DOR.RRB.No.21/31.01.001 /2019-20 dated November 1, 2019 on ‘Issue of additional instruments for augmenting regulatory capital for RRBs’. |
|