RBI specifies Maximum Dividend Payout Ratio for NBFCs (Declaration of dividends by NBFCs)

Ashish M. Shaji

25 Jun, 2021

On June 24, the Reserve Bank of India issued guidelines that specify the eligibility criteria for non-banking financial companies (NBFCs) to declare dividends. The RBI claimed that the new rules are framed with a view to infuse greater transparency and uniformity in practice. In this article, we shall look at the key details of the notification released by the RBI on maximum dividend payout ratio for NBFCs.

Essentials while assessing a proposal for dividend announcements

The board of directors of these firms are required to ensure that they consider the following while assessing the proposal for dividend announcements:

• RBI and National Housing Bank’s supervisory findings on divergence in classification and provisioning for Non-Performing Assets (NPA).
• Qualifications in the auditor’s report to financial statements.
• Long-term growth plans of non-banking financial companies.

Maximum dividend payout ratio for NBFCs: Eligibility criteria for a dividend payment

The Non-Banking Financial Companies and Housing Finance Companies are also required to meet specific benchmarks to qualify for a dividend payment. These benchmarks include the following:

• Minimum capital requirements are fulfilled for the last 3 financial years;
• Net NPA ratio is below 6% in each of the last three 3 years, including the year when the dividend is declared;
•  No explicit restrictions from Reserve Bank of India or National Housing Bank on announcing dividends.

Maximum dividend payout ratio for NBFCs: Quantum of Dividend Payable

The RBI also announced ceilings for dividend payout ratios. The dividend payout ratio means the ratio between total dividend payable and the net profit for a financial year. The ceilings for dividend payout ratios announced by the RBI are as follows:

• NBFCs that don’t accept any public funds and not having any customer interface, no maximum dividend payout ratio (ceiling) has been prescribed.
• Maximum dividend payout ratio for core investment companies (CIC) and standalone primary dealers is set at 60%.
• In case of other NBFCs, the dividend payout ratio is capped at 50%.

It is worth mentioning here that the regulator specified that the total dividend payable should include payments on equity shares and those on compulsorily convertible preference shares eligible for inclusion in Tier 1 capital.

Non-Banking Financial Companies that fail to meet the minimum financial benchmarks mentioned above can be eligible to declare a dividend, subject to a cap of 10% on the dividend payout ratio if they comply with the conditions specified below:

• Meets applicable capital adequacy requirement for the year where they propose to announce the dividend.
• Has the net NPA ratio below 4% at the close of the financial year.

The RBI stated that in case of standalone primary dealers which have the capital adequacy ratio^[1] of 15% (regulatory minimum) or above during each of the quarters of the previous year, but less than 20% in any of those quarters, the dividend payout ratio cannot exceed 33.3%.

Objective of the RBI guidelines

The RBI set the maximum dividend payout ratio as part of its guidelines on distribution of dividend by Non-Banking Finance Companies. As per RBI, the guidelines is aimed at infusing greater transparency and uniformity in the payout practice and shall be effective for declaration of dividend from the financial year ending 31^st March 2022.

These guidelines were proposed first by the Reserve Bank of India in the form of a draft circular in the month of December last year and came after the RBI governor Shaktikanta Das on 4^th December stated that the growing significance of NBFCs and their inter-linkages with various segments in the financial system. The RBI governor had said that it made it imperative to enhance the resilience of the sector.

He had said that it had been decided to put in place transparent criteria as per a matrix of parameters for declaration of dividends by different categories of Non-Banking Financial Companies.

Conclusion

The tightening in dividend payout rules comes within a few weeks of the RBI’s norms on auditor appointments. NBFCs are against the move of auditor appointment, but the Reserve Bank has remained adamant. For better understanding, you may refer to the RBI notification on maximum dividend payout ratio for NBFCs attached with this article.

Read our article:A Complete Overview of Buying and Selling of NBFCs