Profit, Prudence and Payouts: New RBI Regulation for Dividends by Banks

Dayita Kanodia and Simrat Singh | finserv@vinodkothari.com

RBI on March 10, 2026 issued the Reserve Bank of India (Commercial Banks – Prudential Norms on Declaration of Dividend and Remittances of Profits) Directions, 2026 (‘Dividend Directions’). Earlier, a draft was issued on January 6, 2026 seeking comments from stakeholders. The Dividend Directions replaces the existing directions entirely and introduces concepts like Adjusted PAT, CET1-based dividend bucket framework and prescribes a list of ‘ineligible profits’ for the payment of dividend. 

This article discusses the key changes in the regulatory requirements for the payment of dividends by banks.

Adjusted PAT: A risk-adjusted base for dividend distribution

Dividend has to be paid as a percentage of adjusted PAT. Adjusted PAT is the PAT of the financial year for which the dividend is proposed to be paid minus 50% of Net NPA as on March 31 of the financial year for which the dividend is to be paid. By linking dividend payouts with asset quality, the framework ensures that banks with higher stressed assets retain a larger portion of earnings rather than distributing them as dividends.

Maximum Permissible Dividend Payable

Under the earlier directions, whether a bank could declarate dividend or not depended, inter-alia, on a matrix combining CRAR and NNPA ratios and the maximum dividend payout ratio was capped at 40% of net profit, depending on capital adequacy and asset quality. 

The Dividend Directions replace the earlier CRAR-NNPA based matrix with a CET1 capital ratio bucket framework. Under the new system, banks fall within the various ranges of CET1 capital buckets (10 in total), each prescribing the maximum percentage of dividend that may be declared out of Adjusted PAT. At the same time, the overall dividend distribution is capped at 75% of PAT.

An illustration of the computation of the maximum permissible dividend payable is shown below:

(₹ in crores)
Total Assets	500000
PAT	3000
Net NPA (NPA – Prov)	500
Adjusted PAT (PAT – 50%* NNPA)	2,750
CET 1 Capital (end of PY)	12%
Dividend allowed (new directions) [max of (30%*Adj. PAT) or (75% of PAT)]	825
Dividend allowed (erstwhile directions) (35%*PAT)	1050

Ineligible Profits for the payment of dividends

The Directions identify 4 kinds of profits that cannot be used for payment of dividends or remittance of profits:

1. Extra-ordinary or exceptional profits: banks cannot distribute one-time or abnormal profits. The definition of exceptional profits has to be taken from the applicable accounting standards. Banks will therefore have to ascertain the items which lead to extraordinary profits and exclude them while declaring dividends. Any profits from activities or transactions that are not in the ordinary course of business will therefore have to be excluded. 
2. Overstatement of PAT flagged by auditor: If the audit report contains a modified opinion indicating overstatement of PAT, the overstated portion cannot be used for dividend payments.
3. Unrealised gains on level 3 financial instruments: RBI (Commercial Banks – Classification, Valuation and Operation of Investment Portfolio) Directions, 2025 provides that dividends cannot be paid out of net unrealised gains recognised in the Profit and Loss Account arising on fair valuation of Level 3 investments on its Balance Sheet. The same has now been specified under the Dividend Directions as well. 
4. Reversal of excess provisions or unrealised gains from transfer of loans/ SRs guaranteed by GoI: In terms of the RBI (Commercial Banks – Transfer and Distribution of Credit Risk) Directions, 2025, the non cash component of the excess provision remaining with the bank at the time of transfer (Excess provision minus cash received as consideration for transfer) cannot be used for the payment of dividend. Further, with respect to the SRs guaranteed by the GOI, it has been provided that any unrealised gain recognised in the Profit and Loss Account on account of fair valuation of such SR investments shall be deducted from CET 1 capital, and no dividends can be paid out of such unrealised gains. 

Changes in Eligibility Criteria

The earlier directions required banks to maintain CRAR of at least 9% for the preceding two financial years and the relevant financial year, along with an NNPA ratio below 7%, and permitted dividends only out of current year profits. 

The revised framework removes the NNPA threshold and historical CRAR requirements and instead adopts a simple prudential condition, ie., Banks must be in compliance with regulatory capital requirements and must continue to remain compliant even after the proposed dividend payment. In addition, the bank must have a positive Adjusted PAT for the relevant financial year in which the dividend has to be paid. 

Other Relevant Changes

Board Oversight

The Dividend Directions require the Board to evaluate certain factors before approving the declaration of dividend. In particular, the Board must consider RBI supervisory findings relating to divergence in asset classification and NPA provisioning, the statutory auditor’s report including any modified opinion or emphasis of matter, the bank’s current and projected capital position vis-à-vis regulatory capital requirements and the bank’s long-term growth plans. 

Definition of Dividend

Dividend has been clarified to mean to include interim dividend as well. Further, it shall consider dividend payable on equity shares and excludes dividend on Perpetual Non-Cumulative Preference Shares (PNCPS). Dividend payable on compulsorily convertible preference shares will, however, be included. 

Reporting Mechanism

A bank paying dividend or remitting profits to the head office will be required to report details as per the format prescribed under Annex II of the Dividend Directions. The report is required to be furnished to the DoS within a fortnight of declaration of dividend / remitting profits to head office. Earlier, such a report was required to be furnished to the DoR.