RBI Proposes Higher Dividend Payouts for Banks, Government Set to Benefit
The Reserve Bank of India has taken a significant step that could reshape how banks share their profits. In a draft circular released last week, the central bank suggested revising the dividend distribution framework for banks. The new guidelines would allow banks to distribute up to 75% of their net profit as dividends, a substantial increase from the previous 45% limit.
Focus on Core Equity Strength
The proposed changes shift the focus from overall capital ratios to core equity strength. Under the revised framework, dividend eligibility will be more closely tied to a bank's Common Equity Tier-1 (CET-1) ratios rather than broader capital adequacy measures. This approach emphasizes the quality of capital rather than just its quantity.
Banks must meet several prudential conditions to qualify for higher dividend payouts. These include demonstrating sustained profitability, maintaining asset quality thresholds, and ensuring adequate capital through CET-1 ratios. The proposals are currently open for stakeholder feedback until February 5.
Government Stands to Gain from Higher Payouts
For the Indian government, which holds majority stakes in public sector banks, this regulatory change could translate into significantly higher dividend receipts. As the largest shareholder in these institutions, the government would receive a larger share of banking sector profits flowing back into the exchequer.
"This is positive for the government which is the largest shareholder of PSBs," said Karan Gupta, director and head of financial institution at India Ratings and Research. "It gives them a chance to receive higher payouts and with profitability of banks being quite good in recent years, it helps the case even more."
The data supports this potential. According to Press Information Bureau figures, public sector banks declared dividends of ₹34,990 crore in FY25, up from ₹27,830 crore in the previous year. The government's share of these dividends reached ₹22,699 crore in FY25, compared to ₹18,013 crore in FY24.
Shift from CRAR to CET-1 as Key Determinant
The move from Capital-to-Risk Weighted Assets Ratio (CRAR) to CET-1 ratios represents a fundamental change in how regulators assess dividend eligibility. This shift makes the dividend framework more closely aligned with risk and capital quality.
"The change from CRAR to CET-1 is a prudent change," explained Anil Gupta, senior vice president and co-group head of financial sector ratings at ICRA. "The dividend is paid out of profits and the payout ratio can be higher if the bank has strong net worth. CRAR, in contrast, can be boosted by a bank through debt capital instruments."
This distinction matters because CET-1 represents core equity capital, while CRAR includes both tier-1 and tier-2 capital. Tier-2 capital consists of supplementary elements like subordinated debt and certain reserves, which don't provide the same level of protection as core equity.
Industry Response and Practical Considerations
Banking industry leaders recognize the potential benefits but also note practical constraints. While the regulatory change creates headroom for higher payouts, actual dividend decisions remain with individual bank boards.
"It is an individual bank's call," noted a public sector bank chief. "It all depends on how a bank feels how much needs to be paid out but looks like the government will end up getting more dividend."
Some industry experts caution against assuming automatic increases in dividend payouts. A senior state-owned bank official explained that banks must satisfy multiple conditions before reaching the 75% cap, including continuous operating profit and more than 5% incremental operating profit growth.
"It all depends on how the balance sheets ultimately pan out," the official said. "There are many things behind the 75% net profit cap. So, we have to be satisfied before we can touch 75%."
Impact Across Banking Segments
The revised framework appears particularly relevant for private sector banks, where promoter shareholders often seek higher dividend payouts. Data shows that in FY25, the median dividend payout ratio for private sector banks stood at about 9% of net profit, compared to 20% for public sector banks.
Bloomberg data reveals that dividend payout ratios among 16 private lenders ranged from 0.09% to 25% of net profit, while public sector banks showed a wider range of 5% to 30%. This suggests that while private banks might increase payouts, public sector banks already distribute a larger share of profits as dividends.
The regulatory shift represents a balancing act between capital conservation and shareholder returns. By linking dividend eligibility more closely to core equity strength, the RBI aims to ensure that banks maintain adequate buffers while rewarding shareholders when conditions permit.
