Draft rules for dividend pay by NBFCs: RBI proposes 15% CRAR, less than 6% NPAs

The Reserve Bank of India (RBI) on December 9 proposed draft rules for NBFCs to declare dividend.

The Reserve Bank of India (RBI) on December 9 proposed draft rules for non-banking financial companies (NBFCs) to declare dividend.

According to the draft circular released by the central bank, deposit taking NBFCs and systemically important non-deposit taking NBFCs should have Capital to Risk (Weighted) Assets Ratio (CRAR) of at least 15 per cent for last three years, including the accounting year for which it proposes to declare dividend.

Also, the net non-performing (NPA) asset ratio should be less than 6 percent in each of the last three years, including the accounting year for which it proposes to declare dividend, the RBI said.

Non-Systemically Important Non-Deposit taking NBFC should have leverage ratio of less than 7 for the last three years, including the accounting year for which it proposes to declare dividend, the RBI said.

Further, Core Investment Company (CIC) should have Adjusted Net Worth of 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 three years, including the accounting year for which it proposes to declare dividend, the RBI said.

At the time of policy review, the RBI had said unlike banks, currently there are no guidelines in place with regard to distribution of dividend by NBFCs. "Keeping in view the increasing significance of NBFCs in the financial system and their interlinkages with different segments, it has been decided to formulate guidelines on dividend distribution by NBFCs," the RBI said.

Different categories of NBFCs would be allowed to declare dividend as per a matrix of parameters, subject to a set of generic conditions, the RBI had said.

According to the RBI, in case the profit includes any extraordinary profits or income, the payout ratio shall be computed after excluding such extraordinary items. Also, 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, the RBI said.

“In case of any qualification to that effect, the net profit should be suitably adjusted while computing the dividend payout ratio,” the draft circular said.

The RBI further said the proposed dividend should be payable only out of the current year's profit. Also, the RBI should not have placed any explicit restrictions on the NBFC on declaration of dividend, the RBI said.

Comments on the draft circular are invited from NBFCs, industry participants and other interested parties by December 24, 2020, the RBI said.