RBI relaxes dividend rules for banks, keeps capital discipline intact

Mumbai: The Reserve Bank of India (RBI) has softened its proposed dividend payout framework for banks after industry feedback, easing some accounting restrictions while retaining the broader structure that links payouts to core capital strength.

The most significant modification is about how bad loans are treated while calculating profits available for dividend distribution. In the draft proposal issued on 6 January, banks were required to deduct 100% of their net non-performing assets (NPAs) from profit to arrive at adjusted profit after tax.

Following feedback from stakeholders that this assumption was too conservative, the RBI has revised the rule. Under the final framework released on Tuesday, banks will now deduct 50% of net NPAs instead of the full amount when calculating adjusted profit.

The central bank has retained the key feature from the draft framework that tied dividend payouts to banks’ core capital strength rather than overall capital ratios. Banks can distribute dividends based on buckets linked to their common equity tier-1 (CET-1) ratios, subject to an overall ceiling of 75% of profit, from 45% earlier. The final framework which will come into effect from 1 April.

Back to exchequer

On 16 January, Mint reported that the move to allow banks to distribute up to 75% of their net profit as dividends, up from 45% earlier, will lead to higher dividend payout for the government, the majority owner of public sector banks. This meant that a larger share of the sector’s recent profit boom would flow back into the exchequer.

Many bankers believed that while a dividend payout is a bank’s independent call, balancing cash payouts with capital appreciation for investors, the certainty is that the government will end up getting more dividend.

Official data also supports the significance of public sector banks dividends for the exchequer. According to official data, PSU (public sector undertaking) banks declared a dividend of ₹34,990 crore in FY25, as against ₹27,830 crore in FY24. Of the total dividend payout in FY25, the government’s share was ₹22,699 crore as against ₹18,013 crore in FY24.

The shift from capital-to-risk weighted assets ratio (CRAR) to CET-1, which the RBI has retained in the final circular, is also being seen as a key determinant.

A bank’s capital adequacy ratio comprises tier-1 and tier-2 capital. Tier-1 includes common equity tier-1, or core equity, along with instruments such as perpetual bonds. Tier-2 consists of supplementary capital such as subordinated debt and certain reserves.

In essence, CET-1 is a subset of total capital adequacy ratio and tier-1 and tier-2 together determine the total capital adequacy ratio.

Tied to risk, capital quality

The shift makes the dividend framework more closely tied to risk and capital quality, allowing payouts only when banks have strong core equity to support them.

Apart from this, the central bank also accepted suggestions to remove references to emphasis-of-matter observations in statutory auditors’ reports from provisions that determine dividend eligibility, after industry suggestions pointed out that such audit remarks do not necessarily indicate overstatement of profit.

To improve clarity, the RBI further aligned the definition of extraordinary income with existing accounting standards.

However, the regulator rejected several other industry requests, including a proposal to defer the implementation of the dividend framework until the introduction of expected credit loss accounting norms. The guidelines will still take effect from 1 April 2026, the RBI said.

The central bank also declined suggestions to allow dividend limits to be calculated using the current year’s capital ratios. According to the regulator, such a method could distort the capital calculation because dividend payments themselves reduce the common equity tier-1 capital.

Similarly, the RBI reiterated that dividends cannot be paid out of exceptional or one-time income, stating that such profits are non-recurring in nature and therefore unsuitable for distribution to shareholders.