The Reserve Bank of India said that banks with net non-performing assets (NPA) ratio less than 6% and capital adequacy above the minimum regulatory thresholds for the past three financial years should be eligible to declare dividends.
In a draft circular released Tuesday, the regulator proposed a revised the graded dividend payout policy with a higher ceiling on dividend payment to 50% from 40% earlier. The lower the net NPA ratios, the higher would be the dividend payout.
Higher payout ratios would boost earnings of the government, which holds majority shares in public sector banks. The government owns over 90% in several of them.
The net NPA eligibility rule, proposed to be tightened from the previous 7%, won't hurt the payout ratio as most lenders have managed to improve their asset quality over the past few years.
The banking regulator said that dividend payout ratio can be up to 50% for banks with no net NPA for the financial year for which the dividend is proposed. The ratio can be a maximum of 15% if net NPA is more than 4%.
The dividend payout ratio is the ratio between the amount of the dividend payable including interim dividends and net profits for the year. The central bank has suggested any exceptional items inflating net profit be deducted first from the bottom-line while calculating the dividend payout ratio.
The regulator said it would not entertain any request for ad hoc dispensation for paying dividend.
Foreign banks that operate through branch mode in India would be allowed to remit a part of their profit too if they satisfy the eligibility criteria as set for local banks. No prior approval would be required for this if the accounts are audited and in the event of excess remittance, the head office of the bank makes good the shortfall immediately.
FAQs
The banking regulator said that dividend payout ratio can be up to 50% for banks with no net NPA for the financial year for which the dividend is proposed. The ratio can be a maximum of 15% if net NPA is more than 4%.
When RBI proposes tighter dividend payout guidelines for banks? ›
The proposed dividend payable shall include dividend on equity shares only. While lenders with zero NNPA will be allowed to offer 50% maximum dividend payout ratio to their promoters, those with 1%-2% NNPA ratio can offer a maximum of 35%.
Is RBI proposes banks with less than 6 net NPAs to declare dividends? ›
The Reserve Bank on Tuesday proposed allowing banks having net non-performing assets (NPAs) ratio of less than 6 per cent to declare dividends. As per the prevailing norms last updated in 2005, banks need to have a NNPA ratio of up to 7 per cent to become eligible for declaration of dividends.
What is the new NPA rule? ›
If the interest or principal remains overdue for a period 90 days or three months and above the loan account is classified as a Non-Performing Asset (NPA). Once an asset is classified as NPA, it will move back to 'Standard' category if the DPD (days past due) count comes to '0' DPD.
What is the dividend policy of RBI? ›
Dividend payout ratio cap:
40% if net NPA is less than 1% 35% if net NPA is greater than or equal to 1% but less than 2% 25% if net NPA is greater than or equal to 2% but less than 4% 15% if net NPA is greater than or equal to 4% but less than 6%
What makes banks adjust dividend payouts? ›
Economic literature presents three main reasons for adjustments to dividend payouts: asymmetric information between shareholders and management, the presence of agency costs, and regulatory constraints.
What is the new dividend policy? ›
Synopsis. The Reserve Bank of India has proposed a revised graded dividend payout policy, allowing banks with a net non-performing assets (NPA) ratio less than 6% and capital adequacy above regulatory thresholds for the past three financial years to declare dividends.
Do banks count dividend income? ›
If your dividend income exceeds 25% of your total income then some banks will classify you as self-employed. Other banks may accept an accountant's letter from your business accountant and then can keep it simple by just assessing your tax returns and personal situation.
What is the ceiling on dividend payout? ›
There is a limit on the dividend payment made for share dividends. The amount of dividend to be paid in terms of stocks is limited to 20% of the previous issue of shares. This norm is relaxed in case of stock splits by the company.
What is 4 the rate at which the RBI lends money to commercial banks against securities? ›
The correct answer is Repo Rate. Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
To handle NPA, banks use several strategies, such as debt collection tribunals, asset reconstruction, and Lok Adalats. The bank has several legal options to pursue legal action against the person who took the loan and did not repay it.
What is the NPA in 2024? ›
The gross NPA ratio of banks could improve to 2.90-3.05 per cent by FY24 end. NNPA ratio is at a record low at 0.8 per cent as of September 30, 2023, and is likely to trend even lower in the next few quarters as PSBs continue to report improved asset quality figures.
What are the three stages of NPA? ›
Banks are required to classify nonperforming assets into one of three categories according to how long the asset has been nonperforming: sub-standard assets, doubtful assets, and loss assets. A substandard asset is an asset classified as an NPA for less than 12 months.
What is the rule of dividend? ›
Section 123(1) of the Act inter-alia states that “no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year or out of the profits of the company for any previous financial years”.
What is the dividend paying policy? ›
A dividend policy is a policy a company uses to structure its dividend payout. Put simply, a dividend policy outlines how a company will distribute its dividends to its shareholders. These structures detail specifics about payouts, including how often, when, and how much is distributed.
What are the 4 types of dividend policy? ›
First is a regular dividend policy, the second is an irregular dividend policy, the third is a stable dividend policy, and lastly no dividend policy. The stable dividend policy is further divided into per share constant dividend, pay-out ratio constant, stable dividend plus extra dividend.
What is the rule 3 of payment of dividends? ›
Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.
What factors could influence dividend policy of a bank? ›
There are several factors which affect dividend policy, the most important of which are the following: (a) legal rules, (b) liquidity position, (c) the need to pay off debt, (d) restrictions in debt contract, (e) rate of expansion of assets, (f) profit rate, (g) stability of earnings, (h) access to capital markets, (i) ...
What are the rules for dividends in India? ›
In India, a company which has declared, distributed or paid any amount as a dividend, is required to pay a dividend distribution tax at 15%. The Finance Act, 1997 introduced the provisions of DDT. Only a domestic company is liable for the tax.
What will be the treatment of proposed dividend of current year in cash flow? ›
Treatment Of Proposed Dividend In Cash Flow Statement
In the Cash Flow Statement, the previous year's proposed dividend is added to net profit and then subtracted in the financing section. The current year's proposed dividend isn't considered as it's a future obligation.
