Draft Reserve Bank of India (Small Finance Banks – Prudential Norms on Declaration of Dividend) Directions, 2026

Draft Reserve Bank of India (Small Finance Banks – Prudential Norms on Declaration of Dividend) Directions, 2026 DRAFT FOR COMMENTS RBI/2025-26/-- DOR.ACC.REC.No./21.02.067/2025-26 xx, 2026 Reserve Bank of India (Small Finance Banks – Prudential Norms on Declaration of Dividend) Directions, 2026 Table of Contents Introduction ........................................................................................................................... 2 Chapter I ................................................................................................................................ 2 A. Short title and commencement ................................................................................... 2 B. Applicability .................................................................................................................. 2 C. Definitions ..................................................................................................................... 2 Chapter II - Declaration of dividend .................................................................................... 3 A. Board oversight ............................................................................................................ 3 B. Eligibility criteria........................................................................................................... 3 C. Quantum of dividend payable ..................................................................................... 3 D. Deductions from Profit After Tax (PAT) ..................................................................... 4 E. Reporting system ......................................................................................................... 4 F. Restriction on payment of dividend ............................................................................ 5 G. Penal consequences for non-compliance ................................................................. 5 Chapter III - Repeal and other provisions ........................................................................... 6 A. Repeal and saving ........................................................................................................ 6 B. Application of other laws not barred .......................................................................... 6 C. Interpretations .............................................................................................................. 6 Annex I ................................................................................................................................... 7 Annex II .................................................................................................................................. 9 Annex III ............................................................................................................................... 10 1Introduction In exercise of the powers conferred by Section 35A of the Banking Regulation Act (BR Act), 1949, and all other provisions / laws enabling the Reserve Bank of India (‘RBI’) in this regard, RBI being satisfied that it is necessary and expedient in the public interest to do so, hereby, issues the Directions hereinafter specified. Chapter I A. Short title and commencement 1. These Directions shall be called the Reserve Bank of India (Small Finance Banks – Prudential Norms on Declaration of Dividend) Directions, 2026. 2. These Directions shall come into effect from Financial Year (FY) 2026-27. B. Applicability 3. These Directions shall be applicable to Small Finance Banks (SFBs) (hereinafter collectively referred to as 'banks' and individually as a 'bank'). C. Definitions 4. In these Directions, unless the context states otherwise, the terms herein shall bear the meanings assigned to them below. (i) ‘Adjusted Profit After Tax (PAT)’ means PAT of the financial year for which the dividend is proposed to be paid minus Net NPA as on March 31 of the financial year for which the dividend is to be paid. (ii) ‘Dividend’ means dividend payable on equity shares and includes interim dividend but excludes dividend on Perpetual Non-Cumulative Preference Shares (PNCPS); (iii) ‘Exceptional profits / income’ shall have the same meaning as defined under applicable Accounting Standards. 5. All other expressions unless defined herein shall have the same meaning as have been assigned to them under the applicable Acts, Rules / Regulations made thereunder, or any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be. 2Chapter II - Declaration of dividend A. Board oversight 6. The Board of Directors while considering the proposal for declaration of dividend of a bank shall consider the following: i. The divergence in asset classification and provisioning for Non-Performing Assets (NPAs), including its trend, as observed under supervisory findings of the Reserve Bank. ii. Auditors’ Report to the financial statements, including modified opinion or Emphasis of Matter, for the financial year in which the dividend is proposed. iii. Current and projected capital position vis-à-vis applicable regulatory capital requirement; and iv. Long term growth plans. B. Eligibility criteria 7. A bank shall meet the following prudential requirements, to be eligible to declare dividends. i. The bank was in compliance with the applicable regulatory capital requirement as at the end of the previous financial year and shall continue to be in compliance as at the end of the financial year during which the dividend is proposed to be paid. ii. The regulatory capital of the bank shall not fall below the applicable regulatory capital requirement even after the payment of dividend. iii. The bank shall have positive adjusted Profit After Tax (PAT) for the financial year for which the dividend is proposed. iv. The bank shall not be under any explicit restrictions for declaration of dividends from the Reserve Bank or any other authority. C. Quantum of dividend payable 8. A bank which satisfies the eligibility criteria laid down in paragraph 7 above may declare and pay dividend up to the limits prescribed under Table 1 below, but in 3aggregate not exceeding 75% of the PAT for the period for which the dividend is being proposed. Table 1 Dividend allowed as a % of Bucket Tier 1 Capital Ratio as at the end of previous FY adjusted PAT for the period B1 Up to 7.5% 0 B2 Above 7.5% and up to 9.5% 20 B3 Above 9.5% and up to 11.5% 30 B4 Above 11.5% and up to 13.5% 40 B5 Above 13.5% and up to 15.5% 50 B6 Above 15.5% and up to 16.5% 60 B7 Above 16.5% and up to 17.5% 70 B8 Above 17.5% and up to 18.5% 80 B9 Above 18.5% and up to 19.5% 90 B10 Above 19.5% 100 9. The detailed illustrations are given in Annex I. D. Deductions from Profit After Tax (PAT) 10. As regards calculation of PAT for the purpose of these Directions, a bank shall adhere to the following: (i) In case the PAT for the relevant period includes any exceptional and / or extra- ordinary profits / income, or if audit report by the statutory auditor contains a modified opinion (including ‘emphasis of matter’) that indicates an overstatement of the PAT, the same shall be deducted from PAT to the extent it is included in PAT. (ii) In terms of Reserve Bank of India (Small Finance Banks - Classification, Valuation and Operation of Investment Portfolio) Directions, 2025, a bank shall not pay dividend out of net unrealised gains arising on fair valuation of Level 3 financial instruments (including derivatives). (iii) The prudential treatment of reversal of excess provision, dividend payment by a bank on reversal of such provisions and unrealized profits arising on account of transfer of loans and Security Receipts guaranteed by the Government of India shall be guided by the instructions contained in the Reserve Bank of India (Small Finance Banks – Transfer and Distribution of Credit Risk) Directions, 2025. E. Reporting system 11. A bank declaring dividend shall report details thereof as per the format prescribed in Annex II. The report shall be furnished to the Department of Supervision of the Reserve Bank within a fortnight of declaration of dividend. 4F. Restriction on payment of dividend 12. The Reserve Bank reserves the right to place restrictions on distribution of dividend where a bank is found to be non-compliant with the applicable laws, regulations / guidelines issued by the Reserve Bank. 13. If a bank does not meet the eligibility criteria as per paragraph 7 above, no special dispensation will be given for declaration of dividend for that period. G. Penal consequences for non-compliance 14. Non-compliance with any of the provisions contained in these Directions may attract supervisory and / or enforcement action, as applicable. 5Chapter III - Repeal and other provisions A. Repeal and saving 15. The list of circulars repealed with respect to the provisions relating to SFBs coming under the purview of this Direction is in Annex III. 16. The Directions, instructions, and guidelines repealed prior to the issuance of these Directions shall continue to remain repealed. 17. Notwithstanding such repeal, any action taken or purported to have been taken, or initiated under the repealed Directions, instructions, or guidelines shall continue to be governed by the provisions thereof. All approvals or acknowledgments granted under these repealed lists shall be deemed as governed by these Directions. Further, the repeal of these Directions, instructions, or guidelines shall not in any way prejudicially affect: a. any right, obligation or liability acquired, accrued, or incurred thereunder; b. any, penalty, forfeiture, or punishment incurred in respect of any contravention committed thereunder; c. any investigation, legal proceeding, or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture, or punishment as aforesaid; and any such investigation, legal proceedings or remedy may be instituted, continued, or enforced and any such penalty, forfeiture, or punishment may be imposed as if those Directions, instructions, or guidelines had not been repealed. B. Application of other laws not barred 18. The provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations or directions, for the time being in force. C. Interpretations 19. For the purpose of giving effect to the provisions of these Directions or in order to remove any difficulties in the application or interpretation of the provisions of these Directions, the Reserve Bank̥ may, if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these Directions given by the Reserve Bank shall be final and binding. 6Annex I Illustrations of calculation of maximum dividend Note: The calculations are for illustrative purposes only to aid banks in their understanding of the Directions. Illustration 1: Computation of maximum permissible dividend for FY 20X1-X2 Amount Particulars (₹ Crore) Net profit (PAT) for FY 20X1-X2 (A) 17,000 Net NPAs as on March 31, 20X2 (B) 6,500 Adjusted PAT, i.e., (C) = (A) - (B) 10,500 Tier1 Capital ratio as on March 31, 20X1 (D) 11.72% The CET1 ratio falls in bucket B4 75% of PAT(E) 12,750 Max payable as per Table 1 (40% of 10,500) (F) 4,200 Maximum Eligible Dividend (i.e., Lower of E or F) 4,200 Maximum Eligible Dividend as percentage of PAT 24.70% Illustration 2: Computation of maximum permissible dividend for FY 20X1-X2 Amount Particulars (₹ Crore) Net profit (PAT) for FY 20X1-X2 (A) 40,500 Net NPAs as on March 31, 20X2 (B) 5,000 Adjusted PAT i.e., (C) = (A)-(B) 35,500 Tier1 Capital ratio as on March 31, 20X1 (D) 15% The CET1 ratio falls in bucket B5 75% of PAT(F) 30,375 Max payable as per Table 1 (50% of 35,500) (G) 17,750 Maximum Eligible Dividend (i.e., Lower of F or G) 17,750 Maximum Eligible Dividend as percentage of PAT 43.82% 7Illustration 3: Computation of maximum eligible dividend for FY 20X1-X2 Amount Particulars (₹ Crore) Net profit (PAT) for FY 20X1-X2 (A) 1500 Net NPAs as on March 31, 20X2 (B) 300 Adjusted PAT, i.e., (C) = (A) - (B) 1,200 Tier1 capital ratio as on March 31, 20X1 (D) 24.36% The CET1 ratio falls in bucket B10 75% of PAT (E) 1,125 Maximum payable as per Table (100% of 1,200) (F) 1,200 Maximum Eligible Dividend (i.e., G = Lower of E or F) 1,125 Maximum Eligible Dividend as percentage of PAT 75% Interim dividend paid for FY 20X1-20X2 (H) 500 As the bank has already paid interim dividend of ₹500 crore, the final dividend shall 625 not be more than (G) – (H) 8Annex II Details of dividend declared during the financial year Name of the Bank: _________ Net profit# for Net profit determining Dividend for the Rate of Amount of the Payout ratio Accounting accounting dividend dividend (₹ ) Dividend (per cent) period * period Payout (per cent) (₹ ) Ratio (₹ ) *Quarter or half year or year ended as the case may be # excluding any exceptional and/or extra-ordinary profits/ income, or if audit report by the statutory auditor contains modified opinion that indicates an overstatement of net profit (including ‘emphasis of matter’), net unrealised gains on fair valuation of Level 3 financial instruments (including derivatives), reversal of excess provision and unrealized profits arising on account of transfer of loans and Security Receipts guaranteed by the Government of India (as provided in Reserve Bank of India (Small Finance Banks – Transfer and Distribution of Credit Risk) Directions, 2025). ‘Dividend Payout Ratio (DPR)’ means the ratio of the amount of the dividend payable on equity shares (including interim dividend) in a year and the net profit during the year as per the audited financial statements for the financial year for which the dividend is proposed. 9Annex III List of circulars repealed Sr. Circular Number Date of Issue Subject No. a) DO R.ACC.REC.118/21-02-067/2025-26 November 28, 2025 Reserve Bank of India (Small Finance Banks – Prudential Norms on Declaration of Dividends) Directions, 2025 10