RBI eases banks' dividend norms

The Reserve Bank of India has raised the ceiling on the dividends that commercial banks are permitted to pay to 40 per cent of a bank's net profits, from the earlier 33.33 per cent.

Commercial banks can now pay dividends if their net non-performing assets are less than 7 per cent of their total advances and they have had a capital adequacy ratio of at least 9 per cent for three consecutive years, including the latest accounting year.

If a bank does not meet the CAR but has a CAR of at least 9 per cent for the accounting year for which it proposes to declare dividend, it will be eligible to dividend provided its net NPA ratio is less than 5 per cent.

The earlier norms, released in April last year, had stipulated net NPAs of less than 3 per cent and at least an 11 per cent CAR for a bank to qualify for paying dividend. Any bank that did not meet these conditions was required to take the RBI's prior permission to pay dividend.

How many banks will not be able to declare dividends for 2004-2005 is not clear as their latest NPA figures are not in the public domain. In 2003-2004, two public sector banks, Dena Bank and Punjab & Sind Bank, and three private sector banks, Dhanalakshmi, Ganesh Bank of Kurundad and SBI Commercial & International Bank, reported more than 7 per cent net NPAs.

The central bank has discarded the practice of special dispensation (for dividend payouts) for banks that do not meet the eligibility criteria.

The RBI has also made it clear that it will no longer entertain applications for higher dividend payouts than the one for which banks qualify.

The new norms, released today, will enable banks to pay a higher dividend even with a higher net NPA ratio and a bare minimum CAR.

The norms are applicable to the dividends declared for the accounting year ended March 31, 2005, onwards.

The RBI has warned that it will view any violation very seriously and that penalties will be imposed for violations.

An RBI release said it decided "to grant general permission to banks to declare dividends based on the experience gained".

A senior private sector banker said the new dividend payment regulations would allow banks greater leeway and were also a pragmatic step to reduce the administrative burden on the central bank.

With the implementation of Basel II norms fast approaching, the RBI would have otherwise seen most banks queuing up for exemptions from the norms for payment of dividend, another senior banker said.

The other conditions stipulated for payment of dividend include compliance with the prevailing regulations/ guidelines, including creating adequate provisions for impairment of assets and staff retirement benefits and transfer of profits to statutory reserves.

The RBI said banks would have to pay dividend out of the current year's profits.

The central bank had shifted the regulatory focus from the "quantum of dividend" to "dividend payout ratio" in April 2004. But the earlier guidelines had allowed the RBI discretionary powers to grant exemptions and to allow banks not fulfilling certain norms to pay dividend.

The dividend payout ratio is calculated as the "dividend payable in a year" (excluding dividend tax), a percentage of the "net profit during the year".

If the profit for the relevant period includes any extraordinary profits/income, the payout ratio shall be computed after excluding such extraordinary items for reckoning compliance with the prudential payout ratio.

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 that have an adverse bearing on the profit during that year.

The RBI said if any qualification to that effect existed, the net profit should be suitably adjusted while computing the dividend payout ratio.

For 2004-2005, if the investment fluctuation reserve is less than 4 per cent of the securities included in the held for trading and available for sale categories, the dividend payout ratio has to be computed after adjusting net profit to the extent of the shortfall in the IFR.

The reserve is a cushion being built by banks (out of treasury profits) at the directive of the RBI to ward off the impact (if any) of rising interest rates on the bond portfolios of banks.