To make the banking sector more robust and internationally competent, RBI has come out with revised guidelines on dividends payable, corporate debt restructuring and mergers and acquisitions among banks in India. While banks have shown a positive response, analysts are predicting that it will further the banking reforms.
In early May 2005, the Reserve Bank of India issued a circular to all banks regarding the payment of dividends and said that banks can pay dividends up to 40% without permission. This payout ratio has been increased from the earlier 33.33%. It is clear that RBI has changed its focus from quantum of dividend to dividend payout ratio.
The new policy of RBI allows only sound banks to declare dividends and that too, only to a limited extent. It seems that RBI has taken cautious steps while preparing the policy in allowing banks on how much profit they can distribute as dividend. Analysts have predicted that banks may be reluctant to distribute profits due to the requirement of higher capital under the Basel II environment. The new guidelines might help the banks attract more capital in the future. Some critics are also saying that it might increase the central government's income as they are the majority shareholders in public sector banks.
RBI has advised the boards of banks to take into account Basel II requirements, future plans of the bank, statutory auditors reservations, the findings of RBI in its annual financial inspection, etc., while declaring dividends |
