RBI Proposes New Dividend Rules: 75% Payout Cap for Banks
The Reserve Bank of India (RBI) has issued a draft framework on January 6, 2026, proposing to raise the dividend payout cap for commercial banks to 75% of their Profit After Tax (PAT). This is a significant increase from the long-standing 40% limit, designed to offer banks more flexibility while ensuring they maintain robust capital buffers.
The new rules, titled “Prudential Norms on Declaration of Dividend and Remittance of Profits Directions, 2026,” are slated to take effect from the financial year 2026-27.
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1. Key Proposals & Eligibility
Banks will no longer have a “one-size-fits-all” cap. Instead, the payout will be linked to their financial health.
| Requirement | Condition for Payout |
| Capital Adequacy | Must meet minimum CET1 (Common Equity Tier 1) capital requirements. |
| Profit Quality | Dividends must be paid from Adjusted PAT (excludes extraordinary income/unrealized gains). |
| Asset Quality | Boards must assess Net NPAs and provisioning gaps before declaring dividends. |
| RBI Restrictions | Banks under “Prompt Corrective Action” (PCA) or other restrictions are barred from payouts. |
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Graded Structure: The RBI has introduced a ten-bucket structure. Banks with higher capital buffers (higher CET1 ratios) will be allowed to distribute a larger proportion of their profits.
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Exceptions: Small Finance Banks, Payments Banks, and RRBs have slightly different caps (RRBs are proposed at 80%).
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2. Rules for Foreign Banks
The framework also streamlines how foreign banks operating via branches in India remit profits to their head offices.
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Automatic Remittance: Eligible foreign banks can remit net profits without prior RBI approval, provided their accounts are audited and they remain capital-compliant post-remittance.
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Clawback Clause: If an audit later reveals an excess remittance, the head office must immediately return the surplus to the Indian branch.
3. Why is the RBI doing this now?
The move follows a review of guidelines last updated nearly two decades ago (2005). The goal is to:
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Balance Interests: Reward shareholders in well-performing banks.
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Resilience: Ensure banks conserve enough capital to support credit growth and absorb potential losses in a volatile global economy.
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Transparency: Force bank boards to take greater responsibility for long-term capital planning rather than just short-term payouts.
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