Guidelines on treatment of Dividend Equalisation Fund (DEF)- Primary (Urban) Co-operative Banks (UCBs)

Current Context: The Reserve Bank of India (RBI) has issued new guidelines for Primary (Urban) Co-operative Banks (UCBs) regarding the treatment of Dividend Equalisation Funds (DEF).

• Previously, UCBs could not use accumulated profits or reserves for dividend payments and could only pay dividends from the net profit of the current year.
• However, as a one-time measure, UCBs are now permitted to transfer the balances in the DEF to general reserves or free reserves.
• These credit balances in general reserves or free reserves qualify as Tier-I capital according to RBI’s Master Circular.
• Remember that UCBs must comply with applicable State/Central Co-operative Acts, bye-laws, and other relevant laws and regulations.

Question:

1 According to the new RBI guidelines, what can Primary (Urban) Co-operative Banks (UCBs) do with the balances in their Dividend Equalisation Funds (DEF) as a one-time measure?

• A) Transfer them to statutory reserves
• B) Use them to pay off debts
• C) Distribute them directly to shareholders
• D) Transfer them to general reserves or free reserves

Answer: D) UCBs are now permitted to transfer the balances in the DEF to general reserves or free reserves.