RBI Prescribes Maximum Dividend Payout Ratio For NBFCs
RBI announces guidelines for NBFCs seeking to announce dividends, applicable from FY22.
The Reserve Bank of India has laid down prudential requirement for non-bank lenders and housing financiers seeking to announce dividends from FY22. It has also capped the dividend payout ratio for certain categories.
“In order to infuse greater transparency and uniformity in practice, it has been decided to prescribe guidelines on distribution of dividend by NBFCs,” the RBI said in a notification on its website.
The board of directors of these firms must ensure they have considered the following while assessing a proposal for dividend announcements:
Supervisory findings of the RBI and National Housing Bank on divergence in classification and provisioning for non-performing assets.
Qualifications in the auditor’s report to financial statements.
Long-term growth plans.
The NBFCs and housing finance companies will also need to meet certain benchmarks to qualify for a dividend payment. This includes:
Minimum capital requirements are met for the last three financial years.
Net NPA ratio is below 6% for each of the last three financial years, including the year when the dividend is announced.
No express bar from RBI or NHB on announcing dividends.
The regulator also announced ceilings for dividend payout ratios. The dividend payout ratio is the ratio between total dividend payable and the net profit for the given financial year.
NBFCs that don’t accept public funds and do not have any customer interface, no maximum dividend payout ratio has been prescribed.
Maximum dividend payout ratio for core investment companies and standalone primary dealers has been set at 60%.
For other NBFCs the dividend payout ratio has been capped at 50%.
The total dividend payable will include payments on equity shares, as well those on compulsorily convertible preference shares eligible for inclusion in Tier 1 capital, the regulator specified.
NBFCs which don’t meet the minimum financial benchmarks listed above may be eligible to declare a dividend, subject to a cap of 10% on the dividend payout ratio, if they comply with the following conditions:
Meet applicable capital adequacy ratio for the year where they propose to announce dividend.
Net NPA ratio is below 4% at the close of the financial year.
In case of standalone primary dealers where the capital adequacy ratio is 15% or above during each of the quarters of the previous year, but is below 20% in any of the quarters, the dividend payout ratio cannot exceed 33.3%, the RBI said.
The final guidelines have set a relatively relaxed criteria for dividend payout as compared with the draft guidelines, said Manushree Saggar, vice president and sector head at ICRA.
“Over the last three years, dividend pay-out ratios have been about 10-20% for most entities, with few in the range of 20-30%,” said Saggar. “ICRA expects NBFCs to comfortably meet the capital adequacy criteria (which only requires them to meet the minimum regulatory threshold) and the net NPA criteria (<6%) for the past three years, dividend payout for most NBFCs is unlikely to be impacted."