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Declaration of dividends by banks - Revised Guidelines

RBI has reviewed the policy in consultation with the Standing Technical Advisory Committee on Financial Regulation (STACFR) and it has been decided that the regulatory focus with regard to payment of dividend by banks should shift from ‘quantum of dividend’ to ‘dividend payout ratio’. The revised guidelines as under will be applicable to the dividends declared for the accounting year ended March 31, 2004 onwards:-

2. Eligibility criteria for declaration of dividend

(a) Only those banks, which comply with the following minimum prudential requirements, would be eligible to declare dividends without prior approval of RBI.

The bank should have:

CRAR of at least 11 % for preceding two completed years and the accounting year for which it proposes to declare dividend. Net NPA less than 3 %.

The bank should comply with the provisions of Sections 15 and 17 of the Banking Regulation Act, 1949.

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 and Investment Fluctuation Reserve, etc.

The Reserve Bank should not have placed any explicit restrictions on the bank for declaration of dividends.

(b) Quantum of dividend payable

Banks, which qualify to declare dividends consequent upon compliance with the requirements set at 2(a) above would be eligible to pay dividends without obtaining the prior approval of the Reserve Bank, subject to further compliance with the following:

The dividend payout ratio does not exceed 33. 33 %.

The proposed dividend should be payable out of the current year's profit.

Dividend payout ratio is calculated as a percentage of ‘dividend payable in a year’ (excluding dividend tax) to ‘net profit during the year’.

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 ceiling of 33.33%.

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.

(c) Banks, which comply with the requirements at 2(a) above but desire to declare dividends higher than that specified in para 2(b) should obtain prior approval of RBI for declaration of such higher dividend. The RBI would consider the requests received from banks on a case-to-case basis.


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