No dividend freeze. RBI partially lifts freeze on dividend declaration by commercial banks for FY21

The Reserve Bank of India (RBI) has partially lifted the freeze on declaration of dividends by commercial banks for the financial year ended March 31, 2021.

It also permitted cooperative banks to pay dividend on equity shares from the profits of the financial year ended March 31, 2021 as per the extant instructions.

The central bank, on April 17, 2020, had directed commercial banks and co-operative banks not to make any further dividend payouts from the profits pertaining to the financial year ended March 31, 2020 until further instructions.

The RBI issued the aforementioned direction in an environment of heightened uncertainty caused by Covid-19. It said it is important that banks conserve capital to retain their capacity to support the economy and absorb losses.

Latest circular

In its latest circular on ‘Declaration of dividends by banks’, RBI said banks may pay dividend on equity shares from the profits for the financial year ended March 31, 2021, subject to the quantum of dividend being not more than 50 per cent of the amount determined as per the dividend payout ratio.

As per RBI’s 2005 circular on ‘Declaration of dividends by banks’, depending on the matrix criteria of capital to risk weighted assets ratio and net non-performing assets, the dividend payout ratio cannot exceed 40 per cent

Dividend payout ratio is calculated as a percentage of ‘dividend payable in a year’ (excluding dividend tax) to ‘net profit during the year’.

In case the profit for the relevant period includes any extra-ordinary profits/ income, the payout ratio shall be computed after excluding such extra-ordinary items for reckoning compliance with the prudential payout ratio.

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

“Therefore, while allowing banks to pay dividend on equity shares, it has been decided to review the dividend declaration norms for the year ended March 31, 2021,” the circular said.

RBI said all banks shall continue to meet the applicable minimum regulatory capital requirements after dividend payment.

While declaring dividend on equity shares, RBI said it shall be the responsibility of the Board of Directors to inter-alia consider the current and projected capital position of the bank vis-à-vis the applicable capital requirements and the adequacy of provisions, taking into account the economic environment and the outlook for profitability.