Mint Explainer: Why RBI has proposed new rules on dividend payouts by banks

livemint.com:

Mint takes a look into why that might be so, and why RBI needed to update the rules. The proposed framework seeks to tie payout ratios to net non-performing asset ratios, in place of the existing grid-based framework that links capital adequacy levels and net NPA ratio. RBI has tightened the NPA criteria for banks to be eligible to pay dividends.

Only banks with net NPA ratio under 6% can declare dividends under rules proposed in the draft circular, as compared to the prevailing 7%. Banks also need to meet the applicable capital requirement for each of the previous three financial years, including the financial year for which the dividend is proposed. For instance, a commercial bank should have a minimum total capital adequacy of 11.5% to be eligible for declaring dividend.

The proposed requirement for small finance banks and payment banks is 15%, and for local area banks and regional rural banks it’s 9%. RBI has also proposed increasing the ceiling on dividend payout ratio–which is the ratio between the amount of the dividend payable in a year and the net profit–to 50% if net NPA is zero, up from the earlier ceiling of 40%. The regulator has also made it clear that banks cannot make ad hoc dividend payments, which was not the case earlier.

RBI says in its draft circular that it’s revising the guidelines in light of implementation of Basel III standards, the introduction of the prompt corrective action (PCA) framework, and the introduction of differentiated banks where the capital requirements are different. International reforms under Basel III require banks to maintain certain ratios and reserve capital to mitigate risk. Its implementation began in 2022.