What changed
RBI observed UCBs using Dividend Equalisation Fund (DEF) to pay dividends from past profits, which is prohibited. Previously, DEF was considered Tier-II capital. Now, as a one-time measure, UCBs can transfer DEF balances to general/free reserves, making them part of Tier-I capital.
What it means for you
This move boosts UCBs' Tier-1 capital, improving their capital adequacy ratios without fresh infusion. It also ensures dividend payments comply with rules—only from current year net profit after provisions and loss adjustments. Banks must disclose these transfers in financial statements.
What you must do
- Transfer existing DEF balances to general/free reserves as a one-time adjustment.
- Ensure dividend payments are made only from current year net profit, not from reserves or accumulated profits.
- Disclose the transfer in 'Notes on Accounts' per RBI Financial Statements Directions, 2021.
- Comply with applicable State/Central Co-operative Acts and bye-laws.
Who it affects
All Primary (Urban) Co-operative Banks (UCBs), UCB treasurers and finance teams, RBI supervision departments
Can UCBs still use DEF to pay dividends in loss years?
No. The circular reiterates that dividends can only be paid from current year net profit after all provisions and loss adjustments. DEF balances must be transferred to reserves and cannot be used for dividend payments.
Does this change affect all UCBs immediately?
Yes, the circular is effective immediately for all Primary (Urban) Co-operative Banks. It is a one-time measure, so banks should act promptly to transfer DEF balances.