The Reserve Bank of India has proposed significant changes to dividend payout norms for banks, introducing a graded structure based on capital adequacy levels. Under the draft Commercial Banks – Prudential Norms on Declaration of Dividend and Remittance of Profits Directions, 2026, the regulator has raised the dividend payout cap for banks to 75% of net profit from the earlier 40% rule, with implementation scheduled for financial year 2026-27.

Graded Structure Based on CET1 Capital Levels

The RBI has introduced a comprehensive graded framework linking dividend payouts to Common Equity Tier 1 (CET1) capital ratios. Stronger banks with more than 20% CET1 would be allowed to pay 100% of adjusted net profit, which is calculated as net profit minus net non-performing assets for the dividend payment year. However, this remains subject to the overall 75% dividend payout limit.

Special Requirements for Systemically Important Banks

Systemically important banks face even stricter capital requirements for maximum dividend payouts. State Bank of India would need a minimum 20.80% CET1 ratio to pay 100% dividend of adjusted net profit, while HDFC Bank and ICICI Bank would require minimum CET1 ratios of 20.40% and 20.20% respectively.

Enhanced Oversight and Eligibility Criteria

The central bank has established specific conditions that banks must meet before declaring dividends. Bank boards are required to oversee asset quality and provisioning gaps, capital projection and long-term growth plans before declaring dividends. Banks must maintain positive adjusted profit after tax for the period for which dividend is proposed and meet minimum capital adequacy norms.

The regulatory framework establishes differentiated payout limits based on bank categories, with regional rural banks and local area banks facing a higher cap of 80% of profit after tax compared to the 75% limit for commercial banks.

Foreign Banks and Compliance Measures

Foreign banks operating in India through branch mode can remit dividends or surplus without prior RBI approval. However, if excess remittance is found on audit, the head office must return the excess remittance and make good the shortfall. For all banks, any exceptional or extraordinary income, or profit overstatement identified in statutory auditor reports with modified opinions, shall be deducted from net profit calculations.

Public Consultation and Implementation

Stakeholders can submit comments on the draft directions until February 5 through the 'Connect2Regulate' section on the RBI's official website. The comprehensive review reflects the RBI's ongoing efforts to align prudential norms with evolving banking practices while maintaining appropriate regulatory oversight of dividend policies across different categories of banking institutions operating in India.

Major non-banking finance companies have formally requested the Reserve Bank of India to permit retail deposit mobilisation, a move they believe would establish competitive parity with banks and enhance monetary policy rate transmission effectiveness.

High-Level Meeting with RBI Governor

The proposal was presented to RBI Governor Sanjay Malhotra during a closed-door meeting held on Monday. The session brought together chief executives of NBFCs, housing finance companies, microfinance institutions, and industry representatives to discuss sector-specific issues.

Currently, the regulatory framework restricts most NBFCs from accepting retail deposits, with only a select few companies holding legacy licences permitted to do so.

Current Regulatory Landscape

The existing deposit-taking framework shows significant restrictions on NBFC operations:

Among the few NBFCs authorised to accept retail deposits are Bajaj Finance, Shriram Finance, and Mahindra Finance. These companies operate under stringent regulatory oversight and face multiple operational constraints.

Regulatory Concerns and Challenges

The RBI has historically resisted expanding deposit-taking permissions to NBFCs, primarily due to consumer protection considerations. A key differentiating factor remains deposit insurance coverage.

"The critical issue here is that bank deposits, up to ₹5.00 lakh, are insured by DICGC or Deposit Insurance and Credit Guarantee Corporation, unlike NBFC deposits. That is one of the concerns preventing the regulator from issuing new deposit-taking licences to finance companies," explained an economist who requested anonymity.

This insurance gap creates a fundamental risk differential between bank and NBFC deposits, influencing regulatory policy decisions.

Market Concentration and Industry Dynamics

According to the RBI's annual Trend and Progress report, retail deposits represented approximately 12.50% of total resources raised by deposit-taking NBFCs as of March 2025. The market shows high concentration, with five major NBFC-Ds accounting for 96.90% of aggregate deposits in the sector.

Industry Perspective on Deposit Management

Jairam Sridharan, Managing Director of Piramal Finance, provided insights into the operational complexities of deposit management during a November 6, 2025 interview. He emphasised the fundamental differences between lending and deposit-taking operations.

"Few NBFCs have the skills to do deposit management. It's a very different ballgame than giving customers your money. Asking customers for their money requires trust and a certain level of fiduciary abilities internally in governance architectures," Sridharan noted.

He estimated that perhaps 10 to 12 NBFCs possess the necessary capabilities for effective deposit management, while the remaining approximately 9,500 NBFCs likely lack such operational expertise.

Implications for Financial Sector

The NBFC sector's push for retail deposit access reflects broader concerns about funding diversification and competitive positioning within India's financial services landscape. The outcome of these discussions could significantly impact how NBFCs structure their liability profiles and compete with traditional banking institutions for retail funding sources.