This study analyzes the trends and determinants of the dividend policy of banks in India. The banks which are actively traded under Bombay Stock Exchange (BSE) A and B Groups are considered as sample for the study. A multiple regression model, in addition to Lintner model, extended version of Lintner model, such as Brittain's cash flow model, Brittain's explicit depreciation model and Darling's model, have been used for testing the independent variables. The period of study is for ten years, from 1997-98 to 2006-07. Brittain's explicit depreciation model is found to be the best model in explaining the dividend policy of the banks. In other words, the last year divided followed by current year depreciation and current year profit after tax play a positive role in the dividend policy for the current year among Indian banks.

Banks make public issues of their shares to augment their capital. Their shares are traded on various stock exchanges. To establish a new bank in India, the minimum capital requirement is Rs. 200 cr. According to the capital adequacy norms of the Banking Regulation Act, Tier I, Tier II and unallocated reserves are considered for minimum capital adequacy ratio. This forces the banks again to go for a new issue during expansion, though they have sufficient funds by way of deposits. The banks recognize the fact that high prices for their shares will be offered only if the demand for their shares is high. Therefore, the managements of the banks may feel that a high rate of dividend payment can attract investors and increase the demand for their shares. This can happen whenever the shareholders consider the payout ratio of the previous year as the relevant information concerning the wellbeing of the banking entity.

It is often argued that the share prices of a bank tend to be reduced whenever there is a reduction in dividend payments. This may result in loss of reputation and goodwill. It may then be difficult to regain the market position and sustain the high share prices. Such a calculation on the part of the management of the banks may lead to a stable dividend payout ratio. There are certain irreducible administrative costs each time the bank floats new issues. A loss of reputation and reduction in share price may necessitate further floatation to maintain the equity base. A stable dividend payout ratio may be maintained to avoid these costs. Against this background, this study makes an attempt to identify the major determinants of dividend policy and their relative significance on Indian banks.

A classic attempt to explain corporate dividend behavior was made by Lintner (1956). After conducting interviews with the personnel of numerous large, well-established firms of the US, Linter concluded that: (a) Primary determinants of changes in dividend payouts were the most recent earnings and the past dividends paid; (b) Managements focused on the change in the dividends, rather than the amount; (c) Changes were made only when management felt secure that the new level of dividends could be maintained; (d) There was a propensity to move towards some target pay out ratio for most firms, but the speed of adjustment towards the level differed greatly among companies; and (e) Investment requirements generally had little effect on dividend behavior.

Bank Management Journal, Dividend Policy, Indian Bank, Bombay Stock Exchange, BSE, Multiple Regression Model, Cash Flow Model, Banking Regulation Act, Dividend Payout Ratio, Capital Requirement, Lintner Model, Dividend Tax Rate, Corporate Tax.