The Reserve Bank of India (RBI) has prescribed eligibility criteria for declaration of dividend by non-banking finance companies (NBFCs) and also evolved a matrix of criteria for maximum permissible range of dividend payout ratio (DPR), according to a draft circular.
The move is aimed at infusing greater transparency and uniformity in practice in dividend distribution by NBFCs.
The central bank said only those NBFCs, which comply with the minimum prudential requirements relating to capital adequacy and leverage; non-performing assets (NPAs); among others, will be eligible to declare dividend.
The guidelines on distribution of dividend by NBFCs will be applicable for dividend to be declared for the financial year beginning April 1, 2020 (FY21) onwards, the draft circular said.
For declaring dividend, deposit taking NBFC (NBFC-D) and systemically important non-deposit taking NBFC (NBFC-ND-SI) should have capital to risk weighted assets (CRAR) of at least 15 per cent for the last three years, including the accounting year in which it proposes to declare dividend.
In the case of non-systemically important non-deposit taking NBFC (NBFC-ND), the leverage ratio (debt-to-equity) should be less than 7 for the last 3 years, including the accounting year for which it proposes to declare dividend.
In the case of Core Investment Company (CIC), the Adjusted Net Worth (ANW) should be at least 30 per cent of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items for last 3 years, including the accounting year for which it proposes to declare dividend.
The central bank said the net NPA ratio should be less than 6 per cent in each of the last three years, including the accounting year for which the NBFC proposes to declare dividend.
“The proposed dividend should be payable only out of the current year's profit. The Reserve Bank should not have placed any explicit restrictions on the NBFC on declaration of dividend,” according to the draft circular.
Depending on CRAR and net NPA level, the DPR (the amount of dividends paid in relation to the total amount of net income a company generates) could go up to 50 per cent in the case of NBFC-D and NBFC-ND-SI.
Depending on a CIC’s ANW to risk weighted assets position and net NPA ratio, the DPR could go up to 50 per cent.
However, if the CRAR/ leverage/ ANW norms are not met in the previous two years, the applicable NBFCs / CICs would be eligible to pay dividend as per the last category of the matrix, provided, they have achieved minimum regulatory CRAR/ leverage/ ANW norms and their net NPA is less than 4 per cent in the accounting year for which they propose to declare dividend.