The Telegraph
Since 1st March, 1999
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Bank dividend rules tightened

Mumbai, April 23: Only banks that have a capital adequacy of 11 per cent and bad loans (NPAs) less than 3 per cent of their assets can declare dividends without prior Reserve Bank approval.

This is the outcome of a review of banks’ dividend policy by the central bank and the Standing Technical Advisory Committee on Financial Regulation (STACFR). The regulatory focus will shift from the quantum of dividend to the ratio.

Under the revised set of guidelines, a bank should have a capital adequacy ratio of at least 11 per cent in the preceding two years as well as the accounting period for which it proposes to declare a dividend.

“The bank should comply with the prevailing regulations/guidelines issued, including those related to creating adequate provisions for impairment of assets and staff retirement benefits, transfer of profits to statutory reserves and investment fluctuation reserves,” a central bank release said.

However, the new guidelines have inserted a provision that makes it mandatory for banks which fulfil the entire set of conditions to cap their payout at 33.33 per cent. More important, the proposed dividend should be paid out of the current year’s profit.

The Reserve Bank has gone ahead to define profit for the relevant period as a financial ratio that includes extraordinary profits/income. The payout ratio shall be computed after excluding such items.

Moreover, the financial statements pertaining to the accounting year for which a dividend is being declared, should not carry auditor qualifications which have an adverse bearing on profit during the year.

“In case there is any qualification to that effect, the net profit should be suitably adjusted while computing the dividend payout ratio,” the central bank said.

The central bank’s new guidelines came along with indications that it would be ready to allow banks to declare dividends above the ceiling of 33.33 per cent on a case-to-case basis. For this, such banks would have to seek the prior permission of the apex bank.

In case a bank does not meet the criteria prescribed by the RBI relating to capital adequacy ratio and net non-performing assets (NPAs), it should seek the prior approval of the central bank before going ahead with its announcement of a dividend.

“The requests received from these banks would be considered by the Reserve Bank on a case-to-case basis,” the release issued by the central bank said. The revised guidelines will come into force from the accounting year that ended on March 31, 2004 (2003-04).

“In case any bank violates the guidelines, the breach would be viewed very seriously. It would attract penal action under Section 46 of the Banking Regulation Act, 1949,” the Reserve Bank warned in its release.

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