RBI’s 2026 Prudential Directions on Dividends and Profit Remittances for Commercial Banks
The Reserve Bank of India has released the draft Reserve Bank of India (Commercial Banks – Prudential Norms on Declaration of Dividend and Remittance of Profits) Directions, 2026, which are proposed to apply from FY 2026–27. These Directions significantly recast the framework for how commercial banks declare dividends and how foreign bank branches remit profits abroad, with a strong emphasis on capital adequacy, asset quality, and transparent board oversight.
These Directions are issued under Section 35A of the Banking Regulation Act, 1949 and are intended to serve the broader public interest by ensuring that capital buffers and prudential norms are not compromised merely to facilitate shareholder returns or profit transfers.
Scope and Coverage of the Directions
Entities to which the Directions apply
The Directions expressly cover:
- All banking companies,
- Corresponding new banks, and
- State Bank of India,
as defined in subsections (c), (da) and (nc) of section 5 of the Banking Regulation Act, 1949, along with foreign banks operating in India through branches.
These entities are collectively described as “banks”, and individually as a “bank” within the Directions.
Important Exclusion:
Small Finance Banks (SFBs), Local Area Banks (LABs), Payments Banks (PBs) and Regional Rural Banks (RRBs) are not covered under these Directions.
The Directions are slated to become effective from FY 2026–27, meaning dividend declarations and profit remittances for that year onward will be governed by this new regime.
Key Definitions Under the Directions
To understand the operative provisions, the Directions lay down certain core definitions:
Adjusted Profit After Tax (PAT)
- ‘Adjusted Profit After Tax (PAT)’ refers to the PAT of the relevant financial year minus Net NPA as on 31 March of that same year.
- This effectively reduces the distributable base by the value of Net NPAs, thereby discouraging aggressive dividend payouts in the presence of stressed assets.
Dividend
- ‘Dividend’ is defined as the dividend on equity shares, including interim dividends.
- However, it explicitly excludes dividend on Perpetual Non-Cumulative Preference Shares (PNCPS).
Exceptional profit / income
- ‘Exceptional profit / income’ takes the meaning assigned under the applicable Accounting Standards.
- This is important because such exceptional items may be carved out from PAT when computing the amount available for dividend.
Remittance of profit
- ‘Remittance of profit’ denotes the repatriation of profit by a foreign bank operating in India in branch mode to its Head Office abroad.
All other undefined terms are to be construed as per the relevant Acts, Rules/Regulations, or commercial usage, as applicable.
Board-Level Responsibilities and Oversight
Role of the Board when approving dividend or remittance
The Directions impose a clear responsibility on the Board of Directors (or the equivalent bank management in the case of foreign branches) to adopt a prudential and holistic approach before deciding on dividends or profit remittances.
While evaluating any such proposal, the Board must factor in:
RBI supervisory findings on asset classification and provisioning
- This includes any divergence in asset classification or provisioning for NPAs as identified by RBI supervisors, and the trend of such divergence.
- Frequent or material divergences would warrant a more conservative approach to distributions.
Statutory auditors’ report for the relevant year
- Any modified opinion or Emphasis of Matter in the audit report for the financial year for which dividend is proposed has to be critically examined.
- If such audit remarks indicate potential overstatement of profits, the Board must factor this in before recommending distribution.
Current and projected capital position
- The Board must assess the bank’s present and forward-looking capital levels against regulatory capital requirements, including minimum and buffer requirements.
- A bank’s long-term solvency and resilience should not be compromised by short-term payouts.
Long-term growth strategy
- The bank’s business expansion plans, growth trajectory, and capital needs must be considered.
- Capital that might be necessary to support sustainable growth should not be unduly eroded through excessive dividends.
For foreign banks operating in branch mode, references to the Board of Directors are to be read as a reference to the bank’s management in India.