RBI proposes new dividend payment rule for banks, lenders with lower NPAs may offer higher dividends

Current Context: The Reserve Bank of India (RBI) recently proposed a new dividend payment rule for banks, aiming to reward lenders with lower non-performing assets (NPAs) with higher dividend payouts. This move is expected to incentivize banks to improve their asset quality and strengthen their financial stability.

• Here are the key takeaways of the proposed rule:
• Lower NPA threshold for dividend eligibility: Previously, banks needed to have a net NPA ratio of up to 7% to be eligible for dividend declaration. The new rule proposes lowering this threshold to 6%. This means banks with better asset quality will have greater flexibility in distributing profits to shareholders.
• Graded dividend payout based on NPA: The proposal introduces a graded dividend payout system. Banks with the lowest NPA ratios (0%) would be allowed to pay out up to 50% of their profits as dividends, while those with higher NPA ratios would face restrictions. This incentivizes banks to actively manage their bad loans and maintain a healthy financial position.
• Maintaining capital adequacy: The new rule reiterates the importance of banks meeting the applicable regulatory capital requirements for the past three years before declaring dividends. This ensures that banks prioritize maintaining sufficient capital buffers to absorb potential losses.

Question:

Q.1 What is the new proposed net NPA ratio threshold for banks to be eligible for dividend declaration according to RBI’s new rule?
a. 5%
b. 6%
c. 7%
d. 8%