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Dividend declaration guidelines - only maximum ceiling specified; done away with matrix framework

The Reserve Bank of India has issued the final guidelines on distribution of dividend by NBFCs effective from FY22 and onwards. It has specified minimum prudential norms with respect to CAR (of not less than 15% for NBFC-ND-SI, NBFC-D, NBFC-IFCs, NBFC-MFIs, HFCs, government NBFCs), leverage (of not more than 7x only for NBFC-ND) and net NPLs (of <6%) for all NBFCs.

However, it has done away with the suggested matrix framework of dividend payout ratio (based on various levels of these parameters) for NBFC-D and NBFC-NDSI. Instead, the central bank has just specified the maximum ceiling of dividend pay-out ratio at 50% for NBFCs and if norms are not met in each of the three financial years then 10% or NIL (depending on fulfilment of conditionalities). The Board shall ensure dividend proposed does not exceed the ceiling specified.

Minimum prudential requirements to be eligible to declare dividends:

* NBFCs shall meet the applicable regulatory capital requirement for each of the last three financial years including the financial year for which the dividend is proposed.

* Net NPA ratio shall be less than 6% in each of the last three years, including at the close of the financial year for which dividend is proposed to be declared.

Quantum of dividend payout

* 50% ceiling on dividend pay-out ratio. The RBI shall not entertain any request for adhoc dispensation on declaration of dividend.

* NBFC, which does not meet the applicable prudential requirement prescribed above for each of the last three financial years, may be eligible to declare dividend, subject to a cap of 10% on dividend pay-out ratio, provided the NBFC complies with the following conditions:

* Meets the applicable capital adequacy requirement in the financial year for which it proposes to pay dividend

* Has net NPA of less than 4% at the close of the financial year.

Impact analysis

* Most listed NBFCs dividend payout is sub-15%; consequently, they will not have any significant adverse impact of these guidelines on dividend distribution ability.

* In particular, PFC and REC (being NBFC-ND-SI) with CRAR above 15% and net NPA of less than 6% in last 3 years will now be eligible to continue with higher dividend payout (up to 50% payout).

* There are few entities namely HDFC, Indiabulls Housing, Muthoot, Manappuram and Sundaram that regularly pay relatively higher dividend upwards of 15% (sub50%). However, eligibility criteria based on net NPL and CRAR qualify them for the payout as per their recent few years average or even higher.

Capital adequacy and leverage norms suggested for NBFCs

* Non-systemically important non-deposit taking (NBFC-ND) excluding IFCs and MFIs: Leverage ratio shall not be more than 7x at any point of time, with effect from March 31, 2015. NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50% or more of their financial assets) shall maintain a minimum tier-I capital of 12%.

* Deposit taking (NBFC-D) and systemically important non-deposit taking (NBFC-ND-SI) NBFCs including IFCs but excluding MFIs: Maintain a minimum CRAR of not less than 15%; tier-I capital shall not be less 10%; applicable NBFCs primarily engaged in lending against gold jewellery shall maintain a minimum tier-l capital of 12%.

* NBFC-MFIs: Shall maintain a CRAR of not less than 15% and tier-II capital shall not exceed tier-1 capital.

* IDF-NBFC: Shall have a minimum CRAR of 15% and tier-II capital of IDF-NBFC shall not exceed tier–I capital.

* HFCs: CRAR of not less than 15% by FY22 and onwards; tier-I capital, at any point of time, shall not be less than 10%.

* Government NBFCs: Leverage ratio as applicable to NBFC-ND; CRAR of 15% (minimum tier-I capital of 10%) by FY22.

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