RBI sets capital, NPA caps for NBFCs to distribute dividends in draft policy

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December 10, 2020 6:30 AM

The draft sets thresholds in terms of capital adequacy and non performing assets (NPAs) for NBFCs to be eligible to distribute dividends

The company must also comply with provisions of Section 45 IC of the RBI Act, 1934 and with prevailing regulations and guidelines issued by the RBI.

The Reserve Bank of India (RBI) on Wednesday released draft guidelines for distribution of dividend by non-banking financial companies (NBFCs). The draft sets thresholds in terms of capital adequacy and non performing assets (NPAs) for NBFCs to be eligible to distribute dividends. However, the draft also makes exceptions for specific cases and sets the dividend payout ratio for each of them. The guidelines will be applicable for dividend to be declared FY21 onwards.

In order to be able to declare dividend, deposit taking NBFCs (NBFC-D) and systemically important non-deposit taking NBFCs (NBFC-ND-SI) should have a capital to risk-weighted assets ratio (CRAR) of at least 15% for the last three years, including the accounting year for which it proposes to declare dividend. Non-systemically important non-deposit taking NBFCs (NBFC-ND) should have a leverage ratio of less than 7 for the last three years, including the accounting year for which it proposes to declare dividend.

Core investment companies (CICs) should have an adjusted net worth (ANW) of at least 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off -balance sheet items for the last three years, including the accounting year for which it proposes to declare dividend.

The net NPA ratio should be less than 6% in each of the last three years, including the accounting year for which the company proposes to declare dividend. The company must also comply with provisions of Section 45 IC of the RBI Act, 1934 and with prevailing regulations and guidelines issued by the RBI. The proposed dividend should be payable only out of the current year’s profit and the RBI should not have placed any explicit restrictions on the NBFC on declaration of dividend.

However, if the CRAR, leverage or ANW norms are not met in the previous two years, the applicable NBFCs and CICs would be eligible to pay dividend as per terms set out in two annexes to the draft guidelines. To be able to do so, they should have achieved the minimum regulatory CRAR, leverage and ANW norms and their net NPA must be less than 4% in the accounting year for which they propose to declare dividend.

In case the profit for the relevant period includes any extraordinary profits or income, the payout ratio shall be computed after excluding such items. The financial statements pertaining to the year for which the NBFC is declaring dividend should be free of any qualifications by the auditors which have an adverse bearing on the profit during that year. In case of any qualification to that effect, the net profit should be suitably adjusted while computing the dividend pay-out ratio. In case, subject to meeting the minimum regulatory requirement, an NBFC has a different CRAR and a CIC has different ANW in the last three years, dividend payout will be determined based on the lowest CRAR or ANW. The dividend payout ratio shall be calculated as a percentage of dividend payable in a year to net profit during the year.

The terms for exemption will not be applicable to NBFC-NDs and Type I NBFCs. Type I NBFCs are NBFC-NDs which neither accept public funds nor intend to accept public funds in the future and neither have customer interface nor intend to have customer interface in the future. “While NBFC-ND may declare dividend subject to a ceiling of 50% on the dividend pay-out ratio, as per the Board approved policy, Type I NBFC shall not be subject to any ceiling on the dividend pay-out,” the draft said.

A copy of these guidelines must be placed before the board of the NBFC at its next meeting. While deciding on the policy for declaring dividends, the board should take into account the interests of all stakeholders, the supervisory findings of the RBI with regard to divergence in identification of NPAs and shortfall in provisioning, the auditors’ qualifications pertaining to the statement of accounts, and the NBFC’s long-term growth plans.

For standalone primary dealers (SPDs) having CRAR at 20% or above during all the four quarters of the accounting year in which dividend is proposed, the dividend pay-out ratio shall not exceed 60%. “The Reserve Bank will not entertain any request for ad-hoc dispensation on declaration of dividend from SPDs,” the draft said.

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