RBI proposes new capital adequacy rules for bank dividend distribution

The Reserve Bank of India (RBI) has come out with a set of proposed guidelines to tighten capital adequacy requirements before banks distribute dividends. The proposed regulations are in line with Basel III standards and the updated Prompt Corrective Action (PCA) framework and are expected to be implemented from the financial year ending March 31, 2025.

The regulatory framework requires banks to meet certain criteria before declaring dividends. These requirements cover several key aspects:

Banks can declare dividends if they meet regulatory capital requirements for the past three financial years. This includes maintaining minimum ratios such as common equity tier 1 (CET) ratio of 5.5%, capital conservation buffer (CCB) of 2.5% (including common equity), minimum tier 1 capital ratio of 7%, minimum total capital ratio of most The tax rate for commercial banks is 9%. However, certain banks such as regional rural banks, local banks, small finance banks and payment banks have different capital requirements. For example, small finance banks require a CET 1 ratio of 6% and a minimum total capital (CRAR) of 15%.

At the same time, dividend declaration is subject to the net bad debt ratio (NPA) falling below 6% in a particular financial year. If net NPAs exceed this threshold, banks may not be allowed to declare dividends for the year.

For branches of foreign banks operating in India, the draft guidelines provide that they can repatriate profits from operations in India without prior approval from the Reserve Bank of India. This depends on whether these branches meet prudential standards. However, any over-remittance must be corrected immediately.

The Reserve Bank of India has invited public comments on the draft regulations and the feedback window is open until January 31. This step reflects the Reserve Bank of India’s approach to involving various stakeholders in the policy-making process to ensure that the final guidelines are comprehensive and take into account the interests of all parties.

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