What changed
RBI issued consolidated Directions replacing earlier circulars on dividend declaration and profit remittance by commercial banks. Key change: 'Adjusted PAT' now deducts 50% of net NPAs from reported PAT. Banks must also consider supervisory divergences, auditor reports, and capital projections before declaring dividends.
What it means for you
Indian banks will find it harder to declare dividends if they have high NPAs, as adjusted PAT could be significantly lower. Lenders must strengthen NPA management and capital planning. Foreign banks face similar constraints on remitting profits. This aligns dividend policy with asset quality and capital adequacy.
What you must do
- Review NPA provisioning and calculate adjusted PAT (PAT minus 50% of net NPAs) before any dividend proposal.
- Ensure board papers include analysis of supervisory divergences, auditor remarks, and capital projections.
- Update dividend policy to reflect new eligibility criteria and reporting requirements.
- For foreign banks, reassess profit remittance plans against adjusted PAT and regulatory compliance.
Who it affects
All commercial banks (excluding SFBs, LABs, PBs, RRBs), Foreign banks operating in branch mode in India, Board of directors and senior management of banks, Shareholders expecting dividends
How is adjusted PAT calculated under the new Directions?
Adjusted PAT is the reported profit after tax for the financial year minus 50% of the net non-performing assets as on March 31 of that year. This reduces the profit available for dividend distribution.
Do these Directions apply to small finance banks or payments banks?
No. The Directions explicitly exclude Small Finance Banks, Local Area Banks, Payments Banks, and Regional Rural Banks. They apply to all other commercial banks including foreign bank branches.
What happens if a bank fails to meet the eligibility criteria?
The Directions empower RBI to restrict dividend payment or profit remittance. Non-compliance may attract penal consequences as specified in the Directions.