RBI dividend rule change may lift payouts from PSU banks
The new RBI guidelines allow banks to distribute up to 75% of their net profit, subject to meeting certain prudential conditions, including sustained profitability, asset quality thresholds and capital adequacy measured through CET-1 ratios.
Mumbai: The Reserve Bank of India’s (RBI's) move to allow banks to distribute up to 75% of their net profit as dividends, up from 45% earlier, marks a shift in how regulators balance capital conservation with shareholder returns by tying payouts more closely to a bank’s core equity. And, for the government, the majority owner of public sector banks (PSBs), this could mean a larger share of the sector’s recent profit boom flowing back into the exchequer.
In its latest draft circular last week, RBI suggested revising the dividend distribution framework for banks, linking eligibility more closely to core equity strength rather than overall capital ratios. The proposals are open for stakeholders' feedback until 5 February.
The new guidelines allow banks to distribute up to 75% of their net profit, subject to meeting certain prudential conditions, including sustained profitability, asset quality thresholds and capital adequacy measured through Common Equity Tier-1 (CET-1) ratios.
Bankers believe that while a dividend payout is an independent bank's call, balancing cash payouts with capital appreciation for investors, the certainty is that the government will end up getting more dividend.
“It is an individual bank's call. It all depends on how a bank feels how much needs to be paid out but looks like the government will end up getting more dividend," a public sector bank chief said.
From the government’s perspective, higher dividend caps raise the possibility of increased receipts, especially as state-owned banks have reported strong profits in recent years.
“This is positive for the government which is the largest shareholder of PSBs as it gives them a chance to receive higher payouts and with profitability of banks being quite good in recent years, it helps the case even more," said Karan Gupta, director and head of financial institution at India Ratings and Research.
“The government could end up getting more, as earlier there was a cap and now that RBI has raised the cap; dividend payouts are likely to be more," he said.
Official data also supports the significance of PSB dividends for the exchequer. According to Press Information Bureau data, PSU (public sector undertaking) banks have declared a dividend of ₹34,990 crore in FY25 as against ₹27,830 crore in the year ago period. Of the total dividend payout in FY25, the government’s share was ₹22,699 crore as against ₹18,013 crore in FY24.
The shift from capital-to-risk weighted assets ratio (CRAR) to CET-1 is also being seen as a key determinant in the revised framework.
A bank’s capital adequacy ratio comprises tier-1 and tier-2 capital. Tier-1 includes common equity tier-1, or core equity, along with instruments such as perpetual bonds. Tier-2 consists of supplementary capital such as subordinated debt and certain reserves.
In essence, CET-1 is a subset of total capital adequacy ratio and tier-1 and tier-2 together determine the total capital adequacy ratio.
The shift makes the dividend framework more closely tied to risk and capital quality, allowing payouts only when banks have strong core equity to support them.
“The change from CRAR to CET-1 is a prudent change because the dividend is paid out of profits and the payout ratio can be higher if the bank has strong net worth," Anil Gupta, senior vice president and co group head financial sector ratings at Icra said. "CRAR, in contrast, can be boosted by a bank through debt capital instruments and hence higher dividend payouts basis such shored up CRAR may not be prudent."
The revised framework also appears more relevant for private sector banks with promoter shareholders seeking higher payouts, a senior state-owned bank official said.
In FY25, the median dividend payout ratio for private sector banks as a percentage of their net profit was about 9%, as against 20% for PSBs.
A total 16 private sector lenders’ dividend payout ratio, as a percentage of their net profit, was in the range of 0.09-25% and that for PSU banks was 5-30%, Bloomberg data showed.
A material rise in dividends?
While the regulatory change creates headroom for higher payouts, one section of the industry remains divided on whether it will translate into a materially higher inflow for the exchequer.
The government’s gains may not be material largely due to capital constraints at large lenders, they said.
Explaining the nuance, the senior state-owned bank official, who did not wish to be named, cautioned against assuming an automatic jump in dividend payouts.
“It all depends on how the balance sheets ultimately pan out because there are other aspects with respect to dividend payments such as continuous operating profit and more than 5% incremental operating profit. There are many things behind the 75% net profit cap. So, we have to be satisfied before we can touch 75%," the official said.
For example, the dividend payout as a percentage of Punjab National Bank’s net profit for FY25 was 20.04%. The bank’s net profit was ₹16,630 crore and it paid a dividend of ₹3,332.96 crore.
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