Guidelines Issued on Treatment of Dividend Equalisation Fund for UCBs

The Reserve Bank of India (RBI) has issued new guidelines regarding the treatment of the Dividend Equalisation Fund (DEF) for Primary (Urban) Co-operative Banks (UCBs). These guidelines aim to clarify the handling of DEF balances in light of existing regulations and enhance regulatory capital treatment.

Some UCBs have created DEF through the appropriation of profits, intending to use these balances to pay dividends in future years when profits are insufficient or if the bank incurs a net loss. Current guidelines prohibit dividend payments from previously accumulated profits or reserves. Dividends can only be paid from the net profit of the current year after fulfilling all statutory and other provisions and fully adjusting for accumulated losses.

To better treat these balances for regulatory capital purposes, UCBs are now permitted, as a one-time measure, to transfer DEF balances to general reserves/free reserves. The credit balances in general reserves and free reserves will qualify as Tier-I capital per the Master Circular.

UCBs must disclose such transfers in the ‘Notes on Accounts’ section of their Balance Sheet as per the RBI’s Financial Statements – Presentation and Disclosures Directions, 2021, dated August 30, 2021.

This circular applies to all Primary UCBs and is effective immediately.