RBI partially lifts freeze on dividend declarations by commercial banks for fiscal 21

The Reserve Bank of India (RBI) partially lifted the freeze on dividend declarations by commercial banks for the fiscal year ended March 31, 2021.

It also enabled cooperative banks to pay dividends on the shares of the profits for the fiscal year ended March 31, 2021 in accordance with the instructions in force.

The central bank on April 17, 2020, ordered commercial banks and cooperative banks to no longer pay dividends on profits relating to the fiscal year ended March 31, 2020 until further notice.

The RBI issued the aforementioned instruction in an environment of heightened uncertainty caused by Covid-19. He said it is important for banks to conserve capital to maintain their ability to support the economy and absorb losses.

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In its latest circular on “Declaration of Dividends by Banks”, the RBI stated that banks may pay dividends on equity shares out of profits for the year ended March 31, 2021, provided that the amount of dividends does not exceed 50 percent of the amount determined under the dividend payout ratio.

In accordance with the 2005 RBI Circular on “Declaration of Dividends by Banks”, based on the matrix criteria of the capital / risk-weighted asset ratio and net non-performing assets, the dividend payout ratio cannot exceed 40%

The dividend payout ratio is calculated as a percentage of “dividend payable in one year” (excluding dividend tax) compared to “net profit during the year”.

In the event that the profit for the period in question includes extraordinary profits / income, the payout ratio will be calculated after excluding these extraordinary items to take into account compliance with the prudential payout ratio.

“Given the lingering uncertainty caused by the ongoing second wave of Covid-19 in the country, it is crucial that banks remain resilient and proactively raise and retain capital as a bulwark against unexpected losses.

“Therefore, while allowing banks to pay dividends on the shares, it was decided to review the dividend declaration standards for the year ended March 31, 2021,” the circular said.

The RBI said all banks will continue to meet applicable minimum regulatory capital requirements after dividends are paid.

When declaring dividends on the equity shares, RBI stated that it would be for the board of directors to consider, among other things, the current and projected position of the bank’s capital against applicable capital requirements and the adequacy of provisions, taking into account the economic environment and profitability prospects.

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