RBI caps dividend payouts by NBFCs

Mumbai: In a move that will increase transparency regarding the financial health of financial companies, the Reserve Bank of India (RBI) has linked dividend payments to balance sheet parameters. The boards of directors of non-bank financial corporations (NBFCs) have been asked to take into account the RBI observation during supervision and the notes to the accounts before approving a dividend.
The new dividend distribution standards prescribed by the regulator apply to all finance companies, including core investment companies. The rules cap the maximum dividend payout ratio at 50% of net income for all NBFCs, but allow a 60% higher payout for core investment companies and primary distribution companies.
The notification, which comes into effect from FY 22, places no dividend cap on NBFCs that do not accept public funds and do not have a customer interface. However, all finance companies must comply with RBI regulations regarding maintaining a reserve fund.
In terms of balance sheet thresholds, NBFCs must meet the prescribed capital requirement for each of the last three fiscal years to pay a dividend. In addition, the ratio of net non-performing assets (ANP) will be less than 6% during each of the last three years, including at the end of the financial year for which it is proposed to declare the dividend.
The revised standards apply to both stock dividends and convertible capital. If there is an overestimation of net income for a given period, the magnitude of the overestimation must be reduced before calculating the payout ratio.
The final guidelines set relatively flexible criteria for the payment of dividends compared to the draft guidelines. “Over the past three years, dividend payout ratios have been 10-20% for most entities, with few 20-30%,” said Manushree Saggar, vice president and industry manager, ICRA . She added that NBFCs should comfortably meet the capital and NPA adequacy criteria and that “dividend payouts for most NBFCs should not be affected.”

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