The Reserve Bank of India’s (RBI) latest draft proposal on dividend distribution aims to revamp how banks determine dividend payouts, by linking them more closely to core equity rather than overall capital. The central bank has effectively raised the ceiling on how much profit the public sector (and private banks) can return to shareholders.
On paper, the numbers significantly increase dividend headroom. But the finer details are a little more nuanced: higher permissible limits do not automatically translate into higher payouts to investors/shareholders. Here is a closer look at what the RBI has changed, how PSU banks are affected, and what this means for the government and investors.
What the RBI has changed
Under the existing framework, bank dividend payouts were governed by a combination of their CRAR (Capital-to-Risk Weighted Assets Ratio) and NPAs (net non-performing assets). This system allowed banks to meet dividend eligibility even if part of their capital strength came from debt-like instruments.
The RBI’s proposed framework replaces this with a system that ties dividend payouts primarily to core equity strength, measured through the CET-1 (Common Equity Tier-1) ratio. The idea is simple: banks should pay dividends only when they are financially strong using real equity, not when their capital is boosted by debt-like instruments.
The draft norms also outline what counts as “distributable profit.” Banks will have to calculate dividends based on adjusted profit after tax (PAT), which excludes extraordinary income, fair value gains and provision reversals. This ensures dividends are paid from sustainable earnings rather than one-off or accounting gains.
CRAR vs CET-1
Here’s a quick rundown:
- Capital to Risk-Weighted Assets Ratio or CRAR measures a bank’s total capital—including equity and certain debt instruments—relative to its risk-weighted assets. Basically, the measure of a bank’s total capital, including its own money and borrowed funds, compared to its risky assets.
- Common Equity Tier-1 or CET-1 represents the highest-quality capital, mainly common equity and retained earnings, that can directly absorb losses.
CRAR may appear high even when a bank relies on borrowed capital, whereas CET-1 shows the bank’s true financial strength and ability to absorb losses.The RBI’s shift from CRAR to CET-1 reflects a preference for capital quality over capital quantity, ensuring dividends are backed by genuine financial strength.
What are the increased payout numbers?
Under the proposed norms:
Banks can distribute up to 100% of adjusted PAT, subject to a hard cap of 75% of reported PAT.
For PSU banks specifically, the maximum permissible payout ratio rises to about 37%, compared to the lower effective limits earlier under the CRAR-linked framework. (This is still below the ceiling for private banks, whose stronger core equity allows payout ratios of up to 50% under the new system.)
As per ICRA’s estimates for FY2026, outlined in their report, the dividend payout limit for PSU banks under the proposed norms would rise slightly to around ₹70,000 crore versus ₹67,000 crore under current norms (a payout ratio of 37% versus 35%) For private banks, that number is higher, at around ₹1,05,000 versus ₹63,000 crore under current norms (payout ratio of 59% versus 35%). The actual dividend payout ratio in FY2025 for all the banks remains lower than the maximum allowed payout ratio under both proposed and current norms. Historically, PSU banks have paid dividends in the range of 20–30% of net profit, while private banks have typically paid below 20%.
Even with higher caps, most banks are expected to remain well below the new ceilings. In absolute terms, the sector’s total dividend limit would increase significantly under the proposed norms compared to the current norms; however, this would be primarily contributed by the banks with stronger CET 1 buffers.
How does this affect the government?
The government is the majority shareholder in PSU banks, so dividends paid by these lenders flow directly into the exchequer. With PSU banks reporting strong profits in recent years, higher dividend caps raise the possibility of increased government receipts.
Official data shows that PSU banks declared dividends of nearly ₹35,000 crore in FY25, of which the government received about ₹22,700 crore. The new framework strengthens the case for higher payouts, particularly as profitability has improved and balance sheets have cleaned up after years of stress.
How does this affect investors?
For investors, the proposed changes lead to a more positive overall framework, but do not guarantee higher dividends. Dividend payouts will now be linked to sustainable profits, making bank dividends more predictable and disciplined. It may also reduce risk of dividends being paid from one-off gains, and better transparency in the long-term.
To sum it all up….
The ceilings for dividend payouts may have increased, but banks in all likelihood will continue to conserve capital. The proposed changes do not push banks to maximise dividend payouts; instead, they aim to create a stronger dividend distribution framework for the banking sector, while rewarding genuine financial strength: dividends should follow strong core capital.
Sources
RBI dividend rule change may lift payouts from PSU banks
RBI issues draft norms on dividend declaration by banks | Mint