The Hindu Business Line : Weak banks need RBI nod for dividends

THE Reserve Bank of India (RBI) on Friday decided that only healthy scheduled commercial banks would have a free hand in declaring dividends while the weaker ones would need permission from the regulator, which would be given on a case-to-case basis.

Accordingly, banks that have a net NPA of more than 3 per cent of net assets will no longer be able to declare dividends without the prior permission of the RBI, according to a press release.

Going by figures as of March 2003, published in the RBI's `Report on Trends and Progress of Banking in India,' banks such as State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank and, among the private banks, ICICI Bank, United Western Bank, Federal Bank and Global Trust Bank would fail this test as they have NPA ratios above the 3-per cent mark.

The revised guidelines on dividends payable by banks also prescribe that only banks wishing to pay out dividends must have a capital adequacy ratio of at least 11 per cent for the preceding two completed years and the accounting year for which it proposes. Further, they must have made adequate provisions for impairment of assets and staff retirement benefits, transfer of profits to statutory reserves and Investment Fluctuation Reserve. Additionally, the apex bank has said it should not also have placed any explicit restrictions on the bank for declaration of dividends.

With regards to the quantum of dividends, the proposed dividend should be payable out of the current year's profit.

The financial statements pertaining to the financial year for which the bank is declaring a dividend should be free of any qualifications by the statutory auditors, which have an adverse bearing on the profit during that year. In case of any qualification to that effect, the net profit should be suitably adjusted while computing the dividend payout ratio.

Banks may also declare and pay interim dividends out of the relevant accounting period's profit without prior approval of the RBI if they satisfy the minimum criteria prescribed. However the cumulative interim dividends should be within the prudential cap on dividend payout ratio (viz. 33.33 per cent) computed for the relevant accounting period. However, declaration and payment of interim dividends beyond this ceiling require the RBI's prior approval.

The regulatory focus with regard to payment of dividend by banks has been shifted from `quantum of dividend' to `dividend payout ratio,' said the release. This has been done following the RBI's policy review in consultation with the Standing Technical Advisory Committee on Financial Regulation, the release said.

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