The Reserve Bank of India issued new prudential directions governing when Small Finance Banks can declare dividends and how much they can distribute, effective from FY 2026-27. The framework sets eligibility conditions, board oversight expectations, and payout limits linked to regulatory capital, and allows the Reserve Bank to restrict dividend distribution where non-compliance with applicable requirements is identified. Boards must consider supervisory findings on divergence in non-performing asset classification and provisioning, the statutory auditors’ report (including modified opinions or emphasis of matter), the bank’s current and projected capital position against regulatory minima, and long-term growth plans. Eligibility to declare dividends requires capital compliance at the end of the previous financial year and at the end of the year in which the dividend is to be paid, with capital remaining above the applicable minimum even after the payout, a positive “adjusted Profit After Tax” (Profit After Tax less 50% of net non-performing assets as at 31 March of the relevant year), and no explicit restrictions on dividends from the Reserve Bank or another authority. The maximum dividend is determined by Tier 1 capital ratio buckets, ranging from 0% of adjusted Profit After Tax where Tier 1 is up to 7.5% to 100% where Tier 1 exceeds 19.5%, subject to an overall aggregate ceiling of 75% of Profit After Tax for the period. The directions exclude specified profit elements from dividend distribution, including exceptional or extraordinary income, amounts overstated due to audit qualifications, and net unrealised gains on fair valuation of Level 3 financial instruments, with additional referenced limits for certain reversals of provisions and unrealised profits under related Reserve Bank directions. Banks must report dividend details to the Reserve Bank’s Department of Supervision within a fortnight of declaration, and non-compliance may attract supervisory or enforcement action. The directions repeal earlier circulars relating to Small Finance Bank dividend norms, including the 2025 directions, while preserving actions taken under the repealed framework.
Reserve Bank of India 2026-03-10
Reserve Bank of India sets Tier 1 linked limits and a 75% profit cap for small finance bank dividends from FY 2026-27
The Reserve Bank of India has issued new prudential directions for Small Finance Banks on dividend declarations, effective FY 2026-27. The framework outlines eligibility conditions, board oversight, and payout limits based on regulatory capital, with restrictions for non-compliance. Maximum dividends are linked to Tier 1 capital ratios, with a ceiling of 75% of Profit After Tax, excluding certain profit elements.