What changed
RBI has consolidated and updated the prudential norms for dividend declaration by Local Area Banks into a single comprehensive direction effective from FY 2026-27. Key changes include a new definition of 'Adjusted PAT' (PAT minus 50% of Net NPA), explicit eligibility criteria based on capital adequacy and compliance, and a tiered dividend payout cap linked to CRAR as at the end of the previous FY. The board must now consider supervisory divergences, audit reports, and capital projections before declaring dividends.
What it means for you
Local Area Banks will face tighter constraints on dividend payouts, as the new formula links distributable profits directly to Net NPA levels. Banks with CRAR up to 9% cannot pay any dividend, while others are capped at a percentage of adjusted PAT per Table 1, not exceeding 80% of PAT. This forces LABs to prioritise capital conservation and NPA resolution over shareholder returns, aligning with RBI's focus on financial stability.
What you must do
- Recalculate adjusted PAT for FY 2026-27 onwards as PAT minus 50% of net NPAs as on March 31.
- Ensure CRAR remains above applicable minimum both at end of previous year and after proposed dividend payment.
- Board must formally document consideration of supervisory divergences, audit qualifications, and capital projections before approving dividend.
- Review and update dividend policy to comply with the new payout caps and eligibility conditions.
- Submit dividend declaration report to RBI as per the new reporting system outlined in the directions.
Who it affects
Local Area Banks (LABs), Board of Directors of LABs, Shareholders of LABs, RBI supervisory teams monitoring LABs
What is 'Adjusted PAT' and how is it calculated?
Adjusted PAT is the Profit After Tax for the financial year minus 50% of the Net NPA as on March 31 of that year. This adjusted figure is used to determine the maximum dividend payable.
Can a LAB with CRAR below 9% declare any dividend?
No. As per Table 1 of the directions, a LAB with CRAR up to 9% as at the end of the previous financial year is not allowed to declare any dividend (0% of adjusted PAT).
What is the maximum dividend a LAB can pay under the new norms?
The dividend cannot exceed the percentage of adjusted PAT specified in the CRAR-based table, and in any case cannot exceed 80% of the PAT for the financial year for which dividend is proposed.