RBI issues guidelines for NBFCs on dividends distribution, financial stocks gain

With an aim to infuse greater transparency and uniformity, the Reserve Bank of India on Thursday has issued guidelines on the distribution of dividends by non-banking financial companies (NBFCs).  

These guidelines will be applicable to all the NBFCs regulated by the central bank and shall be effective for dividend declaration from the profits of the financial year ending March 31, 2022, onwards.  

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Minimum prudential requirements expected while a declaration of dividend, the RBI said that the net NPA ratio of the NBFC concerned 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 to be declared. 

On the Capital Adequacy front, the NBFCs (other than Standalone Primary Dealers) should have met the applicable regulatory capital requirement for each of the last three financial years, including the financial year for which the dividend is proposed, the apex bank termed it as a basic requirement 

From a board oversight perspective, the RBI said, “The board of directors of NBFCs while considering the proposals for dividend, take into account the following aspects are: Supervisory findings of the Reserve Bank (National Housing Bank (NHB) for HFCs); on divergence in classification and provisioning for Non-Performing Assets (NPAs); Qualifications in the Auditors’ Report to the financial statements; Long term growth plans of the NBFC.” 

The guidelines also prescribe ceilings on dividend payout ratios for NBFCs. It will also have to report details of dividends declared during the financial year to the RBI. 

For an NBFC which is a core investment company, the maximum dividend payout ratio could be 60 per cent and 50 per cent for other NBFCs. However, there is no ceiling specified for NBFCs that do not accept public funds and do not have any customer interface. 

The dividend payout ratio is between the amount of the dividend payable in a year and the net profit as per the audited financial statements. The proposed dividend shall include both dividend on shares and compulsorily convertible preference shares eligible for inclusion in Tier 1 capital, RBI said. 

Nifty Financial Services index is surging by around half per cent, led by M&M Finance, ICICI Lombard, and ICICI Prudential Life. Of 20 scrips on the index, 17 advanced and three declined in the early morning trade.