RBI Prescribes Most Dividend Payout Ratio For NBFCs

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The Reserve Bank of India has set regulatory requirements for non-bank lenders and home financiers looking to announce dividends starting in FY22. It has also capped the dividend payout ratio for certain categories.

“In order to create more transparency and uniformity in practice, it was decided to stipulate guidelines for dividend distribution by NBFCs,” said the RBI in a message on its website.

The boards of directors of these companies must ensure that when considering a proposal for dividend announcements, they have considered:

  • Regulatory findings by RBI and the National Housing Bank on divergence in classification and risk management for distressed assets.

  • Limitations in the auditor’s report on the annual financial statements.

  • Long term growth plans.

The NBFCs and home finance companies must also meet certain benchmarks in order to qualify for a dividend payment. This contains:

  • The minimum capital requirements have been met for the last three financial years.

  • The net NPA ratio is less than 6% for each of the past three fiscal years, including the year the dividend is announced.

  • No express block by RBI or NHB when announcing dividends.

The regulator also announced caps on payout quotas. The payout ratio is the ratio between the total dividend to be paid and the net income for the respective financial year.

  • NBFCs that do not accept public funds and have no customer interface are not required to have a maximum payout ratio.

  • The maximum dividend payout ratio for core investment companies and independent primary dealers has been set at 60%.

  • For other NBFCs, the dividend payout ratio has been capped at 50%.

The total dividend payable includes payments on shares as well as on convertible preference shares that can be included in tier 1 capital, according to the supervisory authority.

NBFCs that fail to meet the minimum financial benchmarks listed above may be eligible to declare a dividend up to a limit of 10% of the dividend payout ratio if they meet the following conditions:

For independent primary dealers, where the capital adequacy ratio is 15% or more in each of the quarters of the previous year, but is not below 20% in any of the quarters, the dividend payout ratio must not exceed 33.3%, said RBI.

The final guidelines set relatively loose criteria for dividend payouts compared to the draft guidelines, said Manushree Saggar, vice president and sector director at ICRA.

“Over the past three years, dividend payout ratios have been around 10-20% for most companies, with few in the 20-30% range,” Saggar said. “ICRA expects the NBFCs to have easily met the capital adequacy criteria (which only require compliance with the minimum regulatory thresholds) and the net NPA criteria (<6%) for the past three years. "