Indian banks set for 131% higher dividend

The 31 combined state‑run and private banks may soon be able to hand over 131% higher dividends to shareholders, driven by the Reserve Bank of India’s (RBI) newly proposed framework on dividend distribution for commercial banks. An assessment of FY2024‑25 financials for these listed banks shows that while they collectively paid about Rs 64,300 crore in dividends last year, the draft norms would allow payouts of nearly Rs 1,48,600 crore, thanks to a more formula‑based, capital‑sensitive approach to determining limits.

State‑run banks could distribute 37% higher dividends, rising to Rs 47,997 crore from the Rs 34,998 crore paid in FY25. Private sector banks would see a far sharper jump, becoming eligible to pay up to Rs 1 lakh crore, compared with the Rs 29,258 crore they actually distributed.

New Formula

The RBI’s Commercial Banks, Prudential Norms on Declaration of Dividend and Remittance of Profits Directions, 2026 introduces a transparent, quantitative system that replaces the earlier discretionary approach. Dividend eligibility will now be tied to two key parameters: the bank’s Common Equity Tier 1 (CET1) capital ratio and its Adjusted Profit After Tax (PAT).

Sanjay Agarwal, Senior Director, CareEdge Ratings, said, “The RBI’s approach reflects a balance between supporting the government’s fiscal needs and preserving the central bank’s financial resilience.”

Applying the formula to FY2025 numbers of 12 listed PSU banks shows a significant uplift in their dividend‑paying capacity. Collectively, these banks reported Rs 1.78 lakh crore in net profit and Rs 55,716 crore in net NPAs, resulting in Adjusted PAT of Rs 1.23 lakh crore. Their CET1 ratios—ranging from 10.8% for SBI to over 17% for Indian Overseas Bank—place most of them in buckets that allow 30–60% of Adjusted PAT to be paid out as dividends. Since the CET1‑linked limit is lower than the 75% PAT cap for most banks, it becomes the binding constraint. Under the draft norms, permissible dividends rise from Rs 34,998 crore actually paid for FY25 to Rs 47,997 crore, a 37% increase.

Adjusted PAT is defined as net profit minus net NPAs, ensuring that banks with cleaner balance sheets and lower credit stress gain greater dividend flexibility. To qualify, a bank must meet prudential conditions, comply with regulatory capital requirements in both the previous and current financial years, have positive Adjusted PAT, and not be under supervisory restrictions.

Once eligible, the maximum dividend is determined through a two‑step cap. The first restricts payouts to 75% of reported PAT. The second is linked to the CET1 ratio, slotted into a 10‑bucket grid. Banks with CET1 ratios just above the regulatory minimum (below 8%) cannot pay dividends, while those with CET1 above 20% can distribute 100% of Adjusted PAT. The lower of the two—75% of PAT or the CET1‑linked percentage of Adjusted PAT—becomes the maximum permissible dividend.

For banks with CET1 above 20%, the entire Adjusted PAT becomes eligible unless it exceeds 75% of PAT, in which case the PAT cap applies.

Private Lenders Lead

Large private lenders such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank see the biggest expansion in dividend headroom. HDFC Bank’s actual FY25 payout of Rs 16,835 crore compares with a CET1‑linked eligibility of Rs 39,219 crore, while ICICI Bank’s payout could rise from Rs 7,835 crore to Rs 20,803 crore. Mid‑sized banks—Federal Bank, City Union Bank, Karur Vysya Bank, and J&K Bank—also gain additional room, though their CET1‑linked limits remain modest relative to larger peers.

Not all private banks qualify. IndusInd Bank and Dhanlaxmi Bank fail to meet eligibility criteria because their Adjusted PAT turns negative after deducting net NPAs, disqualifying them from dividend distribution. Others such as Yes Bank and IDFC First Bank show limited headroom due to weaker Adjusted PAT positions.

Agarwal added that by tightening dividend norms, the RBI is ring‑fencing bank capital and protecting depositor confidence, with stronger buffers translating into a more stable banking ecosystem.

A senior private‑sector bank official said that although most large banks do not approach the earlier 40% payout ceiling, allowing payouts of up to 75%—subject to CET1 thresholds and additional buffers for systemically important banks—signals a push for stronger shareholder rewards.

Analysts pointed out that while the banking system is reporting strong ROEs, business growth remains subdued. As a result, banks are accumulating excess capital that can be returned to shareholders. For instance, if a bank records a 17% ROE and business growth is closer to 12%, the additional 5% capital buffer may not be required and can be distributed.

The enhanced dividend headroom also allows the government to secure higher returns from PSU banks, especially ahead of stake dilution in lenders where government shareholding exceeds SEBI’s 75% threshold—namely Indian Overseas Bank, Punjab & Sind Bank, UCO Bank, and Central Bank of India.

Among PSU banks, SBI, Bank of Baroda, Union Bank of India, Indian Bank, and Bank of Maharashtra are expected to benefit the most, given their strong capital buffers and improved asset quality. Even banks that paid modest dividends earlier—such as UCO Bank, Central Bank of India, and Indian Overseas Bank—gain additional room due to healthier CET1 ratios and lower NPAs.

For the government, the new framework offers meaningful fiscal upside. But the RBI’s intent is clear –to encourage disciplined balance‑sheet management, reward well‑capitalised banks, and ensure dividend distribution does not compromise financial stability.