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The Reserve Bank of India has linked declaration of dividend by non-banking finance companies (NBFCs) to their meeting minimum prudential norms on capital and bad loans.
The RBI also set the maximum payout ratio as part of its guidelines on distribution of dividend by NBFCs. The RBI said the guidelines, aimed at infusing greater transparency and uniformity in the payout practice, will be effective for declaration of dividend from the financial year ending March 31, 2022.
Board oversight
While considering a dividend proposal, the board has to take into account supervisory findings of the RBI (National Housing Bank for housing finance companies) on divergence in classification and provisioning for non-performing assets (NPAs).
The board must also consider any qualification in the auditor’s report to the financial statements, as also the long-term growth plans of the NBFC.
NBFCs (other than standalone primary dealers or SPDs) need to meet the mandated capital requirement for each of the three previous financial years, including the financial year for which the dividend is proposed.
For example, every deposit-taking NBFC is required to maintain a minimum capital ratio (of Tier I and Tier II capital) of not be less than 15 per cent of its aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items.
Net NPA and other criteria
The net NPA ratio shall be less than 6 per cent in each of the last three years, including as at the close of the financial year for which the dividend is proposed.
NBFCs and HFCs have to transfer to the reserve fund not less than 20 per cent of their net profit every year as disclosed in the profit and loss account and before any dividend is declared.
Banking expert V Viswanathan said that since NPAs could go up in view of the Covid pandemic effect on borrowers, the RBI is tryingto ensure that NBFCs and HFCs with net NPAs above 6 per cent do not declare dividend but increase their internal accruals.
Dividend payout ceilings
In case the net profit for the relevant period includes any exceptional and/or extraordinary profits/income or the financial statements are qualified (including ‘emphasis of matter’) by the statutory auditor that indicates an overstatement of profit, the same has to be reduced from the net profits while determining the dividend payout ratio (DPR).
There is no ceiling DPR for NBFCs that do not accept public funds and do not have any customer interface. The maximum DPR for core investment companies and SPDs is 60 per cent, that for NBFCs is 50 per cent.
The RBI said an NBFC (other than an SPD) that does not meet the prudential requirement for each of the last three financial years, may be eligible to declare dividend, subject to a cap of 10 per cent, and certain conditions.
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