The Reserve Bank of India (RBI) has issued certain conditions for non-banking financial companies (NBFCs) seeking to pay dividends to shareholders from the financial year ending 31 March 2022.
As per the new guidelines, which seek to bring in greater transparency and uniformity, both NBFCs and housing finance companies (HFCs) will need to comply with the minimum prudential requirements to be eligible to announce dividend. The new guidelines are far more relaxed as compared with the draft guidelines shared earlier.
According to the RBI, the conditions are specific to different categories of NBFCs, which will have to meet minimum capital adequacy ratios, net non-performing asset (NPA) ratios, and a few other criteria to be able to declare dividend.
For instance, lenders with net NPAs above 6% for each of the last three financial years, including the year when the dividend is announced, will not be able to pay a dividend.
The dividend payout ratio, which is the ratio between the amount of the dividend payable in a year and the net profit, is now capped at 50% to 60%, depending upon the nature of the business. However, there will be no cap on NBFCs that do not accept deposits.
An NBFC will need to meet the mandated capital requirement for each of the last three financial years. For instance, a deposit-taking NBFC should have a capital adequacy ratio of at least 15% for the last three years.
The non-deposit-taking NBFC should have leverage ratio of below 7% for the last three years, and a core investment company should have adjusted net worth of at least 30% of its aggregate risk-weighted assets on its balance sheet and risk adjusted value on off-balance sheet items for the last three years. Standalone primary dealers should maintain a minimum capital-to-risk weighted assets ratio of 20% for the financial year for which dividend is proposed.
Further, the board of directors of an NBFC, while considering the proposals for dividend shall consider supervisory findings of the regulator on divergence in classification and provisioning for bad loans.
The board should also look at qualifications in the auditors’ report to the financial statements and long-term growth plans of the NBFC.
“The board shall ensure that the total dividend proposed for the financial year does not exceed the ceilings specified in these guidelines," RBI said.
“The Reserve Bank shall not entertain any request for ad-hoc dispensation on declaration of dividend,” the circular added.
This setting of norms brings out the growing significance of NBFCs. However, market experts point out that over the last three years, dividend payout ratios have been about 10-20% for most NBFCs and HFCs, with some in the range of 20-30%. Hence dividend payout for most NBFCs and HFCs is unlikely to be impacted.