The Aryavarth Express:
New Delhi: The Reserve Bank of India (RBI) has introduced a new prudential framework for banks that caps dividend payouts at a maximum of 75 per cent of Profit After Tax (PAT) for most banking institutions. The move aims to align profit distribution more closely with banks’ capital strength, profitability and regulatory compliance.
The central bank issued the Reserve Bank of India (Commercial Banks – Prudential Norms on Declaration of Dividend and Remittance of Profit) Directions, 2026 on March 10. The new guidelines will come into effect from the financial year 2026–27 and will replace the earlier directions issued in November 2025.
Under the revised framework, banks incorporated in India that meet the prescribed eligibility criteria will be allowed to declare dividends within the specified limits, but the total payout cannot exceed 75 per cent of their Profit After Tax for the relevant financial period.
According to the RBI, banks must meet several prudential conditions before declaring dividends or remitting profits. These include maintaining compliance with regulatory capital requirements at the end of the previous financial year and continuing to meet those requirements in the year the dividend is proposed.
The regulator also clarified that a bank’s regulatory capital must not fall below the required level even after the dividend payout.
Banks incorporated in India must report a positive adjusted Profit After Tax for the period for which the dividend is proposed. Similarly, foreign banks operating in India in branch mode must have a positive PAT for the period for which profits are to be remitted to their head offices.
In addition, banks must not be under any explicit restriction from the RBI or any other authority regarding the declaration of dividends or remittance of profits.
The prudential norms have also been extended to other categories of banks. Small Finance Banks and Payment Banks will also face a dividend cap of up to 75 per cent of Profit After Tax, provided they meet the regulatory requirements.
However, Local Area Banks and Regional Rural Banks (RRBs) will be permitted to declare dividends of up to 80 per cent of Profit After Tax, subject to compliance with the same prudential conditions.
For all these banking categories, institutions must continue to meet regulatory capital requirements both before and after the proposed dividend payout and must report positive adjusted profits for the relevant financial year.
The RBI has also emphasised the responsibility of bank boards in overseeing dividend decisions. Boards will be required to ensure compliance with the prudential framework, including eligibility criteria, payout limits and reporting obligations to the regulator.
The directions further specify that certain categories of profits will not be eligible for distribution. The framework includes provisions outlining profits that cannot be used for dividend payments or profit remittances by foreign banks operating in India through branch mode.
The new norms also introduce reporting requirements and restrictions on dividend payments, along with potential penalties for banks that fail to comply with the rules.
In its notification, the RBI stated that it has repealed the earlier directions in the public interest.
“The Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest, hereby repeals the Reserve Bank of India (Commercial Banks – Prudential Norms on Declaration of Dividends and Remittance of Profit) Directions, 2025, with effect from FY 2026–27,” the central bank said.
Along with the main framework for commercial banks, the RBI has issued additional directions extending similar prudential principles to other banking categories, including Payment Banks, Local Area Banks, Regional Rural Banks and Small Finance Banks.
The central bank has also amended the guidelines on the setting up of wholly owned subsidiaries by foreign banks. Under the revised rules, wholly owned subsidiaries of foreign banks incorporated in India will be allowed to declare dividends in the same manner as domestic banks.
These amendments will also take effect from the financial year 2026–27.
