RBI Relaxes Dividend Rules For Banks, Allows Higher Payouts While Retaining Capital Discipline

The Reserve Bank of India (RBI) has made an amendment to its dividend distribution policy for banks based on suggestions from various stakeholders of the banking industry. It has eased accounting guidelines while retaining the overall framework that links dividend payments with banks’ core capital. The revised framework is set to come into effect from April 1, 2026.

Under the revised rules, banks will deduct 50% of their net non-performing assets (NPAs) while calculating adjusted profit after tax for dividend distribution. In the draft guidelines issued on January 6, banks were required to deduct 100% of net NPAs from profits while determining the amount available for dividend payouts.

The RBI said the modification was introduced after stakeholders highlighted that the earlier requirement was overly conservative.

Dividend Payout Cap Raised To 75%

The final framework retains the central feature linking dividend payouts to banks’ Common Equity Tier-1 (CET-1) capital ratios instead of broader capital adequacy measures.

Banks will be allowed to distribute dividends based on CET-1 ratio-linked payout buckets, subject to an overall cap of 75% of profit. Earlier rules permitted dividend payouts of up to 45% of profit.

According to the RBI, the shift toward CET-1 ratios ensures that dividend distribution remains tied to the quality of a bank’s capital and its ability to absorb financial risks.

A bank’s capital adequacy ratio consists of Tier-1 and Tier-2 capital. Tier-1 capital includes common equity tier-1 capital along with instruments such as perpetual bonds, while Tier-2 capital includes supplementary capital such as subordinated debt and certain reserves.

Impact On Government Dividend Receipts

The change in dividend rules could increase dividend receipts for the government, which is the majority shareholder in several public sector banks.

According to official data, public banks sector declared dividends of ₹34,990 crore in FY25 compared with ₹27,830 crore in FY24.

Of the total dividend declared in FY25, the government’s share amounted to ₹22,699 crore, higher than ₹18,013 crore received in FY24.

The higher dividend ceiling under the revised framework allows banks to distribute a larger share of profits to shareholders, subject to regulatory conditions.

Other Changes In Final Framework

The RBI also accepted industry suggestions to remove references to “emphasis-of-matter” observations in statutory auditors’ reports from provisions determining dividend eligibility. Industry participants had pointed out that such remarks do not necessarily indicate an overstatement of profits.

The central bank also aligned the definition of extraordinary income with existing accounting standards to improve clarity in profit calculations.

However, the RBI rejected the suggestion of deferring the implementation of the framework until the adoption of expected credit loss accounting standards. Nevertheless, it was confirmed that the revised dividend rules would come into effect from April 1, 2026.

It was reiterated by the RBI that dividend payments cannot be made from exceptional or one-time income since it is not recurring in nature and cannot be distributed among shareholders.

The updated framework continues to link dividend payments with capital strength but with changed rules of calculation after receiving suggestions from banks and stakeholders.