RBI Proposes Major Changes in Banks’ Dividend Policy, May Allow Them to Distribute 75% of PAT

The Reserve Bank of India (RBI) has suggested a significant change in how much dividend banks can share with their shareholders. In a draft proposal released for public consultation, the central bank has said that the maximum dividend payout could be up to 75 per cent of net profit, compared to the current cap of 40 per cent.

This proposal, if accepted, will come into effect from the financial year 2026-27. The RBI has invited comments from stakeholders until 5 February before finalising the new rules.

Banks Must Weigh Financial Health Before Declaring Dividends
However, as per the guidelines, boards of banks need to meticulously examine their financial position before deciding on how much dividend it should distribute. It demands a look at the quality of loans, the adequacy of provisions set aside for bad loans, the strength of their capital reserves, and their long-term growth strategies. In a nutshell, banks will not be able to plainly declare dividends solely based on profits, but they must ensure that their balance sheets are robust enough to take care of risks and future growth.

Who will be covered?
The revised rules will apply to all commercial banks, including the State Bank of India and foreign banks that operate in India through branches. However, certain categories of banks, such as small finance banks, payments banks, regional rural banks and local area banks, will not be covered under this framework.

Capital-linked payout system explained
The RBI has introduced a graded system that links dividend payouts to a bank's capital strength. Capital strength is measured through what is called the Common Equity Tier-1 (CET1) ratio. This ratio shows how much of a bank's core capital is available to absorb losses.

The draft proposes a ten-level structure. Banks with stronger CET1 ratios will be permitted to distribute higher dividends, up to the maximum of 75 per cent of the profit. Those with weaker capital buffers will have to restrict payouts to lower levels.

How profits will be calculated
For the purpose of dividend calculation, the RBI has said that adjusted profit after tax will be used. This figure will be arrived at after subtracting the value of net non-performing assets (NPAs) as of 31 March of the relevant year.

The draft also makes it clear that banks cannot declare dividends from one-off or extraordinary income. This includes unrealised gains from changes in asset values or profits generated from reversing excess provisions, unless the RBI's existing rules specifically allow it.

Supervisory checks before payouts
Bank boards will also have to consider supervisory observations made by the RBI. This includes any differences noted between the bank's own classification of loans and provisions and what the regulator finds during inspections. Such divergences must be factored in before finalising dividend payouts.

Rules for foreign banks
Foreign banks that operate in India through branches will be allowed to send profits back to their head offices without seeking prior approval from the RBI. However, this will only be permitted if they meet the eligibility criteria, have audited accounts, and continue to meet capital requirements even after remitting profits.

The central bank has emphasised that it will retain the authority to stop dividend payouts or profit remittances if banks fail to comply with regulatory requirements. In other words, banks that do not meet the prescribed norms will not be given any special relaxation.

Balancing shareholder returns with stability
According to the RBI, the new framework is designed to strike a balance between rewarding shareholders and ensuring that banks conserve enough capital to remain resilient. The central bank said the revised rules aim to support sustainable growth, especially at a time when risk profiles are changing and supervisory expectations are rising.