RBI imposes strict rules on banks' 'coffers'! Banks must follow stringent regulations for paying dividends; learn about the 75% formula..

The Reserve Bank of India (RBI) has proposed setting a limit on the dividends that banks can pay to their shareholders. Under this proposal, no bank will be allowed to pay dividends exceeding 75 percent of its net profit. The Reserve Bank defines "dividend" as the amount payable on equity shares and includes interim dividends. However, it excludes dividends paid on perpetual non-cumulative preference shares.

The proposed rule will apply to all Indian banks, while the limit will be 80 percent for Regional Rural Banks and Local Area Banks. The RBI stated in the draft that before declaring dividends, the bank's board of directors must consider the long-term growth plan and capital position. Furthermore, the bank's net profit must be positive during the period for which the dividend is being proposed.

Rules for Foreign Banks
The same rules will apply to foreign banks operating branches in India. These banks can only remit profits to their headquarters for periods with positive net profits. Foreign banks operating under the branch system in India can remit dividends or surplus amounts without prior permission from the RBI. However, if the audit reveals that an excess amount has been remitted, the head office of that foreign bank will have to return the excess amount and make up for the shortfall.

Consequences of Irregularities
For local banks as well, adjustments will be made if profits are overstated. The RBI stated that if the net profit includes any extraordinary or exceptional income, or if the statutory auditor's audit report contains a modified opinion indicating an overstatement of profits, it will be deducted from the net profit. The RBI also stated that it reserves the right to restrict dividend distribution or profit remittance if a bank fails to comply with laws, rules, or guidelines. The Reserve Bank has sought suggestions from the public and banks on this draft proposal until February 5th.

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