Reference to Master Circulars:

• Master Circular DOR.CAP.REC.5/09.18.201/2024-25 dated April 01,2024
• Master Circular DoR.CRE.REC.71/07.10.002/2023-24 dated January 16, 2024
• Circular UBD.BPD.(PCB).Cir.No.4/12.05.001/2012-13 dated July 05, 2012

Some Urban Co-operative Banks (UCBs) have established a Dividend Equalisation Fund (DEF) by appropriating profits, intending to use these funds to pay dividends in future years when profits are insufficient or if the bank incurs a net loss. However, the guidelines on “Declaration of Dividends by UCBs” dated July 5, 2012, prohibit paying dividends from previously accumulated profits or reserves. According to these guidelines, dividends can only be paid from the current year’s net profit after making all statutory and other provisions and fully adjusting for accumulated losses. Additionally, UCBs have been including DEF balances as part of Tier-II capital.

To improve the regulatory capital treatment of these balances, it has been decided, as a one-time measure, to allow UCBs to transfer DEF balances to general reserves/free reserves. The credit balances in general reserves/free reserves will qualify as Tier-I capital as per our Master Circular ibid.

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. UCBs shall comply with the provisions of applicable State/ Central Co-operative Acts & bye-laws, and other applicable laws, statutes and regulations.

The aforesaid guidelines are applicable to all Primary (Urban) Co-operative Banks and will come into force with immediate effect.

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