RBI proposes to limit banks’ dividend payout to 75% of PAT

Kolkata: The Reserve Bank of India (RBI) on Tuesday proposed increasing the dividend payout ceiling for banks to 75% of net profit from the earlier 40% rule. It also wants bank boards to monitor asset quality and provisioning gaps, capital projections and long-term growth plans before declaring a dividend. The regulator has laid out a graduated structure for dividend payouts in a draft proposal, based on banks’ common equity tier 1 (CET1) capital levels, and is seeking comments on it by February 5.

Stronger banks with more than 20% CET1 would be allowed to pay 100% of adjusted net profit, which will be net profit minus net non-performing assets for the dividend payment year, the regulator said in a statement on its website. However, this would be subject to the 75% dividend payout limit. Systemically important banks – State Bank of India (SBI), HDFC Bank and ICICI Bank – would need even stronger CET1 ratios if they plan to pay 100% dividends of their adjusted net profit.

For example, SBI would require a CET1 ratio of at least 20.8% for this, while the minimum CET1 ratios of HDFC Bank and ICICI Bank would be 20.4% and 20.2% respectively, according to the regulator/analysts’ calculations.

Meanwhile, banks with less than 8% CET1 should not pay dividends at all.

These guidelines will come into effect from the financial year 2026-27, the RBI said. Certainly, banks – both Indian and foreign banks operating locally in a branch mode – must be profitable and meet the minimum capital adequacy standard to pay dividends.

Foreign banks operating in India in branch mode can distribute dividends or surplus without prior approval of the RBI. However, if an audit finds too many remittances, the head office of that foreign bank must refund the excess remittances and make up the shortfall, the regulator said.

Excessive profit settlements should also be deducted for local banks. If the net profit includes exceptional or extraordinary income, or if an audit report of the statutory auditor contains a modified opinion indicating overstatement of profit, it will be deducted from the net profit, the RBI said.