The Reserve Bank of India (RBI) has unveiled a draft proposal to regulate how much banks can pay out as dividends. According to the draft directions titled “Commercial Banks – Prudential Norms on Declaration of Dividend and Remittance of Profits, 2026”, banks will now be allowed to distribute up to 75% of their net profit after tax (PAT) as dividends to shareholders.
This proposed cap is higher than the previous informal norm of roughly 40% and applies to commercial banks, small finance banks, and payments banks. Regional Rural Banks (RRBs) and Local Area Banks (LABs) may have a slightly higher ceiling of 80% of PAT. The draft specifically excludes dividends on Perpetual Non-Cumulative Preference Shares (PNCPS), but covers interim dividends on equity shares.
Linking Dividends to Capital Strength
The RBI’s framework ties dividend payouts to a bank’s capital position. Banks with strong Common Equity Tier 1 (CET1) ratios may be allowed to distribute up to their full adjusted net profit, subject to the 75% cap. Adjusted net profit removes extraordinary items or overstated profits to reflect the bank’s true earning strength.
Banks with low capital buffers – for instance, CET1 ratios below 8%, may be barred from paying dividends entirely. The Board of Directors is expected to weigh long-term growth plans, capital projections, and asset quality before approving dividends.
Foreign Banks in India
For foreign banks operating in India, the draft mandates that dividend remittances to head offices must only occur if the branch operations report a positive adjusted PAT. While RBI approval is not required beforehand, any excess remittances discovered during audits must be returned to India.
Timeline and Feedback
The RBI is inviting comments on the draft until February 5, 2026. If finalized, the directions would come into effect in the 2026–27 financial year, starting April 2026.
Why This Matters
– Strengthening Bank Capital: By linking dividends to capital adequacy, banks will retain more capital to absorb losses, continue lending, and remain resilient in stress scenarios.
– Preventing Excessive Payouts: Banks are encouraged to prioritise financial stability and long-term growth over short-term shareholder returns.
– Enhancing Governance: Boards will need to rigorously assess asset quality, provisioning gaps, and future capital requirements before dividend approvals.
In simple terms, the RBI is moving to balance shareholder rewards with financial prudence, ensuring banks remain stable while still allowing reasonable profit sharing.