RBI Revises Dividend Payout Norms for Banks

On 10 March 2026, the Reserve Bank of India (RBI) issued five Master Directions, four Repeal Directions and one Amendment Guideline to revise the extant instructions on declaration of dividend and remittance of profit applicable to banks. Directions have been issued to Commercial banks, Small Finance Banks, Local Area Banks, Payment Banks, and Regional Rural Banks (RRBs). These norms will come into effect from Financial Year 2026–27 and will replace the earlier directions which were released on November 28, 2025.

Earlier consultations on this matter includes a draft circulated in January, 2024, on declaration of dividend by banks and remittance of profits to Head Office by foreign bank branches in India. However, based on the stakeholder feedback and consultations, a new methodology for computing the maximum eligible dividend payout by various banks was issued for comments in January 2026. Based on the feedback, the present master directions were released replacing the 2025 directions. Highlights of the directions include:

Cap on Dividend Distribution

As per the Directions, Commercial Banks, Small finance Banks and Payment Banks are prohibited from declaring dividends exceeding 75% of their Profit After Tax (PAT) for the relevant financial year whereas RRBs and Local Area Banks are capped at 80%. This cap seeks to ensure that banks retain sufficient earnings to maintain capital adequacy and support future growth.

In addition, banks must ensure that their regulatory capital remains above the prescribed minimum capital requirement even after the payment of dividends.

Quantum of Dividend

·      Based on CET1 Ratio

The directions for commercial banks introduce a capital-based framework for determining the maximum permissible dividend, linked to the Common Equity Tier-1 (CET1) ratio of banks incorporated in India. According to the framework, the permissible dividend payout varies depending on the bank’s CET1 ratio at the end of the previous financial year.

·      Based on Tier 1 Capital Ratio

The dividend percentage allowed by small finance banks, payments banks and RRBS is dependent on the Tier 1 Capital Ratio as at the end of previous FY ranging from upto 7% to above 19.5%.

·      Based on CRAR

The dividend percentage allowed by Local Area Banks is dependent on the CRAR as at the end of previous FY from upto 9% to above 21%.

The Directions also address the remittance of profits by foreign banks operating in India through branch mode. Such banks may remit their net profits (after tax) to their head offices without prior approval from the RBI, provided that the bank meets the prescribed eligibility conditions and its financial statements have been duly audited.

Profits Ineligible for Dividend Distribution

The Directions clarify that certain categories of income cannot be used for dividend payments or profit remittance. These include exceptional or extraordinary income, profits that may be overstated due to a modified audit opinion, and unrealized gains arising from the fair valuation of Level 3 financial instruments.

Reporting and Regulatory Oversight

Banks declaring dividends or remitting profits are required to report the details to the RBI’s Department of Supervision within a fortnight of such declaration or remittance in the prescribed format.

The RBI reserves the right to restrict dividend payments or remittance of profit where a bank fails to comply with regulatory requirements. In addition, non-compliance with the directions may attract supervisory and/or enforcement action.

The repealed norms lacked several key definitions. The quantum of dividend payouts was determined based on a matrix of criteria, including CRAR and an NNPA ratio not exceeding 40%. Additionally, the framework did not prescribe any penalty provisions for non-compliance.