The Reserve Bank of India (RBI) on Tuesday issued draft norms where it proposed that banks with net non-performing assets (NNPA) ratio of less than 6 per cent can only declare dividends.
It also mooted that the lenders must meet the applicable regulatory requirement capital for each of the last three financial years, including the year for which the dividend is proposed.
According to the prevailing norms last updated in 2005, banks need to have an NNPA ratio of up to 7 per cent to become eligible for declaration of dividends.
“The net NPA ratio, for the financial year for which the dividend is proposed, shall be less than 6 per cent,” the RBI said.
It added that the rules have been reviewed in the light of implementation of Basel III standards, the revision of the prompt corrective action (PCA) framework and the introduction of differentiated banks.
The PCA framework places restrictions on the scope of operations of a weak bank till it is nursed back to health. It kicks in if the lender falters in any of the set parameters.
The RBI has proposed that the new guidelines should come into effect from 2024-25. It added that while considering a dividend proposal or remittance of profits (in the case of foreign banks), the board of directors or the bank’s management should consider the divergence in classification and provisioning for bad loans including its trend.