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.

India's banking system has reached a significant liquidity milestone, with the loan-to-deposit ratio (LDR) climbing to a record 81.6% as of December, according to the latest data from the Reserve Bank of India (RBI). This metric, which measures how much of a bank's deposits have been lent out, serves as a crucial indicator of banking sector health and liquidity conditions.

Understanding the Loan-to-Deposit Ratio Signal

The LDR provides insights into banking sector dynamics, with higher ratios typically indicating strong credit demand and economic activity. However, sustained levels above 80% are widely considered a tight liquidity zone that can present operational challenges for banks.

While the RBI does not impose a hard regulatory cap on LDR, prolonged periods in this elevated zone can gradually impact bank margins, constrain loan growth, and reduce policy transmission effectiveness without triggering an immediate crisis.

Contrasting Growth Trends Drive Ratio Increase

The recent LDR surge stems from two divergent trends occurring simultaneously within the banking system. Credit growth has rebounded significantly after a weak 2024-25 (FY25), now running at approximately 12%. This growth is supported by increased lending across multiple segments:

• Higher auto loan disbursements
• Expanded unsecured retail lending
• Increased gold loan offerings
• Enhanced lending to micro, small, and medium enterprises (MSMEs)

Goods and services tax cuts and strong festive season demand have further contributed to this lending momentum.

Conversely, deposit growth has decelerated sharply, slipping into single digits as households increasingly redirect savings from traditional bank deposits toward higher-return investment avenues such as mutual funds and equities.

Bank-Level Impact and Market Response

Recent provisional data from banks and Macquarie research indicates deposit growth is trailing loan growth by 250-300 basis points this quarter, reversing the brief stabilization observed in 2025. This pressure extends beyond system-wide metrics to individual bank performance.

HDFC Bank's LDR reached 99.50% in the October-December quarter of 2025 (Q3FY26), and despite reporting relatively strong business momentum, the stock has faced investor pressure due to concerns over such elevated ratios. Similar trends have emerged across other private and public sector banks.

Implications and Risk Assessment

Elevated LDR levels matter significantly for banking sector operations and monetary policy effectiveness. High ratios can restrict future credit growth once banks have largely deployed their available deposits. Additionally, they may weaken the transmission of RBI interest rate cuts and squeeze banks' net interest margins, as lenders might need to raise deposit rates to attract additional funds.

However, several factors suggest the situation warrants careful monitoring rather than immediate alarm:

• Banks maintain excess statutory liquidity ratio (SLR) buffers
• Asset quality across the system remains stable
• Credit growth appears largely demand-driven rather than speculative
• New liquidity coverage ratio (LCR) norms implementation is expected to be eased from April 1, providing operational relief

Outlook and Monitoring Requirements

The rising LDR represents a structural change in India's banking landscape rather than a temporary spike, with the ratio climbing steadily from 75.8% in June 2023 to the current 81.6%. While not constituting a red flag for immediate crisis, this trend represents a slow-burning risk requiring close monitoring by investors and policymakers. The banking sector's ability to manage this liquidity challenge while maintaining healthy credit growth will be crucial for sustained economic momentum.