The Reserve Bank of India (RBI) has introduced revised rules on how banks can declare dividends and remit profits, bringing stricter conditions to ensure stronger financial discipline. The updated guidelines link dividend payouts more closely to a bank’s capital strength and asset quality, aiming to prevent profit distribution from weakening financial stability. Finalised after feedback on draft norms released in January 2026, the new framework will come into effect from the financial year 2026–27 and will apply to both Indian banks and branches of foreign banks operating in the country.
Tighter conditions to declare dividends
Under the revised guidelines, banks will have to meet stricter eligibility criteria before announcing dividends. They must comply with all regulatory capital requirements at the end of the previous financial year as well as during the year in which the dividend is proposed. In addition, their capital levels should remain above the regulatory minimum even after the payout is made.
For Indian banks, declaring dividends will also depend on reporting a positive adjusted profit after tax (PAT). The Reserve Bank of India has defined adjusted PAT as the reported PAT minus 50% of net non-performing assets (NPAs) as of March 31. This method creates a more conservative estimate of profits that banks can safely distribute to shareholders.
For branches of foreign banks operating in India, profits can be sent to their head offices only if the branch reports a positive profit after tax (PAT). In addition, any bank that is under supervisory or regulatory restrictions imposed by the Reserve Bank of India or any other regulator will not be permitted to declare dividends or remit profits. These measures are meant to ensure that only financially stable banks distribute earnings.
Some types of income cannot be used for dividends
The central bank has also clarified that certain types of income cannot be considered while calculating dividends or profit remittances. These include exceptional or one-time gains, profits that may appear higher due to a modified audit opinion, and unrealised gains from Level-3 financial instruments. Such instruments are usually valued using financial models instead of actual market prices.
According to the Reserve Bank of India, the step is meant to ensure that dividend payouts are based on stable and sustainable earnings, rather than temporary accounting adjustments or volatile gains.
Dividend limits tied to banks’ capital strength
The Reserve Bank of India has also linked dividend payouts to the capital strength of banks. For Indian banks, the overall dividend payout ratio has been capped at 75% of profit after tax (PAT). However, the exact payout allowed will depend on a bank’s Common Equity Tier-1 (CET1) capital ratio, meaning banks with stronger capital buffers may distribute a higher share of profits.
Banks whose CET1 ratio is close to the regulatory minimum will not be allowed to declare dividends. As the capital ratio improves, the permitted payout gradually increases. At the highest capital levels above 20 per cent along with the additional buffer required for domestic systemically important banks lenders may distribute up to 100% of adjusted PAT, provided they meet all other eligibility conditions.
Foreign Banks Allowed To Remit Profits Without Prior RBI Approval
Foreign bank branches operating in India that meet the required eligibility criteria will now be allowed to remit their net profits to their head offices without seeking prior approval from the Reserve Bank of India (RBI). However, the RBI has clarified that if any excess amount is remitted later, the head office must return it immediately.
Bank boards to take a closer look before approving dividends
The Reserve Bank of India has also stressed that bank boards must exercise greater caution before approving dividend payouts. Boards are required to review supervisory observations made by the RBI, including any differences in non-performing asset (NPA) classification or provisioning highlighted during inspections. They must also carefully examine audit reports, especially those that contain modified opinions or emphasis-of-matter remarks.
Apart from this, boards are expected to assess the bank’s current and future capital position and consider long-term growth plans before taking a final decision on dividend distribution. This step is aimed at ensuring that payouts do not affect the bank’s financial strength.
