The Reserve Bank of India has asked urban cooperative banks to transfer the balances in the Dividend Equalisation Fund (DEF) to general reserves or free reserves.
“The credit balances in general reserves/free reserves, shall qualify as Tier-I capital and the suitable disclosures shall be made of such transfers in the ‘Notes on Accounts’ to the Balance Sheet in terms of Reserve Bank of India (Financial Statements – Presentation and Disclosures) Directions, 2021 dated August 30, 2021”, said RBI while releasing the circular in this connection on Tuesday.
The apex bank further said, “It is observed that some UCBs have created the Dividend Equalisation Fund (DEF) through appropriation of profits, with an intent to utilise these balances to pay dividend in future years, when profits are not sufficient or where the bank has posted a net loss”, the apex bank stated.
“However, extant guidelines on “Declaration of Dividends by UCBs” dated July 05, 2012 ibid prohibit dividend payments from previously accumulated profits or reserves and mandate that dividend can only be paid by the banks from net profit of the current year after making all statutory and other provisions and after adjustment for accumulated losses in full”, the RBI added.
It further said, “It is also observed that UCBs have been considering the balances in DEF as part of Tier-II capital”.
“In order to provide a better treatment of these balances for regulatory capital purposes, it has been decided, as a one time measure, to permit UCBs to transfer the balances in the DEF to general reserves/free reserves”, RBI stated.
UCBs shall comply with the provisions of applicable State/ Central Co-operative Acts & bye-laws, and other applicable laws, statutes and regulations. The above circular is applicable to all Primary (Urban) Co-operative Banks. The instructions shall come into force with immediate effect.