Dividend payouts are now linked to the bank’s Common Equity Tier 1 (CET1) ratio; Earlier, the limits were linked to capital to risk-weighted assets ratio (CRAR) and net non-performing advances (NPAs).
The final norms are also looser than the draft. Banks will only deduct 50% of net NPAs (after provisioning) from profit after tax to calculate profit eligible for dividend. The draft had proposed a full net NPA reduction to arrive at a qualifying profit.
RBI guidelines state that the maximum allowable payout is now 100% of adjusted PAT, subject to a ceiling of 75% of reported PAT. Icra’s rating estimates that the original dividend payout ratio is unlikely to rise materially. The guidelines are effective from April 1, 2027.
“The overall contribution margin of the sector will increase significantly under the proposed norms as compared to the current norms; however, this will primarily be supported by stronger CET 1 buffers from banks,” said Sachin Sachdeva, Deputy Director, Sector Head – Financial Sector Ratings. “Going forward, ICRA estimates that a majority of scheduled commercial banks (10 out of 13 public sector banks (including IDBI) and 13 out of private sector banks) will witness an increase in the dividend payout limit under the new norms.”
For foreign banks operating as branches, the RBI allowed remittance of post-tax profits from Indian operations without prior approval, provided the accounts are audited and any excess is returned. Such payments cannot be made out of extraordinary gains, increased profits identified by the auditor.
Under the new framework, payment bonds are accounted for with CET1 “buckets”, ranging from 0% to 100% of adjusted profit after tax depending on the bank’s financial CET1 ratio, provided that the aggregate contribution in each year does not exceed 75% of the reported PAT. Banks that are considered systemically important are assessed against the CET1 threshold that includes their D-SIB buffer, identified as “z” in the regulations. D- SIBs are systemically important banks. To be eligible, borrowers must meet regulatory capital requirements at the end of the previous financial year and be compliant after the proposed repayment; They should also post a positive adjusted PAT for the period and not face any apparent regulatory sanction. Adjusted PAT is defined as PAT minus 50% net NPAs as on March 31 for the relevant year.
