Reserve Bank of India has introduced new Dividend Distribution policies for NBFCs. The decision aimed to instill improved transparency and uniformity in NBFC’s practice.
The new dividend distribution policies shall apply to the following NBFCs
- NBFC-Systemically Important Non-Deposit taking entity and deposit-taking entity (RBI) directions, 2016
- NBFC-Non- Systemically Important Non-Deposit taking entity (RBI) directions, 2016
The policies shall come to effect from the profits of the fiscal year ending 31st March 2022 and onwards.
The members of the boards are accountable to take the following aspects into account before considering the proposals for dividends.
- Supervisory findings of the RBI (National housing Bank and Housing Financial companies) on disparities in provisioning and classification for NPAs
- Qualifications cited in the Auditors’ Report to the financial statements; &
- Long term development blueprint of the NBFC
RBI also mandates NBFCs to ensure 100% adherence to the specified ceilings limit while taking the total dividend amount for the fiscal year into consideration.
Eligibility criteria to be met by NBFC for dividend declaration
As per RBI, NBFCs are supposed to ensure conformity with given minimum prudential prerequisites before declaring a dividend.
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Sl. No. |
Parameter |
Requirement |
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1. |
Capital Adequacy |
(a) NBFCs (excluding Standalone Primary Dealers, aka SPDs) must satisfy the applicable regulatory capital prerequisites for the preceding three years including the year for which the dividend is proposed. (b) SPDs are required to maintain a minimum CRAR (Capital Adequacy Ratio) of 20% for the financial year (for all quarters) for which a dividend is proposed. |
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2. |
Net NPA |
The net NPA ratio must not be less than 6% in each of the last 3 financial years, including as at the closure of the fiscal year for which dividend is proposed. |
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3. |
Other criteria |
(a) NBFCs shall ensure conformity with the provisions of Section 45 IC of RBI Act, 1934. Housing Finance Companies shall adhere to the provisions of Section 29 C of the NHB Act, 1987. (b) NBFCs must adhere to existing norms released by RBI. The RBI or the NHB (for Housing Finance Companies) shall not have imposed any limitations on dividend declaration. |
Read our article:RBI to limit funding in NBFCs from Non-compliant Financial Action Task Force Nations
How much amount NBFCs can pay as a dividend in light of new RBI’s policies?
The Eligible NBFCs are supposed to pay out dividends in light of the following conditions for dividend declaration prescribed by the Reserve Bank of India.
- The dividend payout ratio is equivalent to the ratio between the dividend payable amount in a year & the net profit as per the audited balance sheet for the fiscal year for which the dividend is proposed.
- The proposed dividend must entail both dividends on equity shares & compulsorily convertible preference shares (CCPS) eligible for inclusion in Tier 1 Capital.
- In the event, the net profit for the given period entails any exceptional income or the financial statements are authenticated (inclusive of ’emphasis of matter’) by the auditor that manifests an overstatement of net profit, the same must be deducted from the net profits which computing the Dividend Payout Ratio[1].
- The eligible NBFCs must adhere to the following ceiling limit sets out for dividend payout ratios
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Ceilings related to the Dividend Payout Ratio |
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Sl. No. |
NBFC Classification |
Max. Dividend Payout Ratio (%) |
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1. |
NBFCs (non-deposit taking) having no customer interface |
– |
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2. |
Standalone Primary Dealers (SPDs) |
60 |
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3. |
Core Investment Company (CICs) |
60 |
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4. |
Other NBFCs |
50 |
(e) RBI shall revoke any request relating to ad-hoc dispensation on dividend declaration.
- A NBFC (excluding SPD) which fails to comply with applicable prudential requisites cited in Para 5 above for each of the preceding 3 fiscal years, may declare a dividend, subject to a cap of 10% on the payout ratio if they adhere to given conditions:
(a) Meets the applicable CRAR limit in the financial year for which it proposes to pay out the dividend; and
(b) Has net NPA less than 4& as at the ending of the financial year.
- as per the prevailing norms cited in para 30 of Master Direction- SPDs (RBI) Direction, 2016, in the case of SPDs which have a CRAR equivalent or higher than the regulatory mini. of 15 % during each of the quarters of the preceding financial year, but minimum than 20% in any of those quarters, the payout ratio shall not surpass 33.3%.
Guideline related to Reporting System for dividend distribution
NBFC-D, NBFC-ND-SI, CIC, and HFC are required to report the details of the dividend declared during the financial year in the format given below, namely Annex 2. The report must be submitted to the Reserve Bank/ Department of Supervision of NHB within two weeks post declaration of dividend.
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accounting Period* |
Net Profit for the specific |
Dividend Rate (%) |
Dividend Amount (INR) |
Dividend Payout Ratio |
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accounting period (INR) |
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Conclusion
RBI’s decision to inculcate new guidelines is likely to strengthen the dividend distribution policies of NBFCs by imparting improved transparency and uniformity. Also, it seems that these guidelines will make these institutions more credible from investors’ and shareholders ‘viewpoints. Despite a generous reputation and strong footprint, NBFCs often face the heat from the regulators on various fronts, including financial management. RBI as a primary regulator incorporates relevant amendments every now and then to keep prevailing loopholes out of the equation.
Read our article:Corporate Governance in NBFC- A Detail Overview
