RBI’s new draft on dividends to make NBFCs balance sheet strong, create surplus for fresh loans

RBI’s latest draft on the declaration of dividends by non-banking financial companies (NBFCs) may help them in strengthening their balance sheet by improving leverage ratios and creating a buffer and surplus for fresh lending. RBI’s move will also help NBFCs in creating better provisioning against the delinquent assets, said a report by India Ratings. As the risk profile of NBFCs is changing at a fast pace, there was a need for a regulatory framework for dividend declaration, the report added. The draft circular said that non-deposit and systemically-important NBFCs with capital-to-risk weighted assets ratio (CRAR) below 15 per cent and net NPAs above 6 per cent will not be able to pay any dividend.

NBFCs emerged as a crucial segment during the pandemic as demand for credit has substantially increased in NBFCs. In order to infuse greater transparency and uniformity in practice, it has been decided to prescribe guidelines on the distribution of dividends by NBFCs, RBI said. 

However, the RBI draft circular does not commensurate with the guidelines issued by the Department of Investment and Public Asset Management (DIPAM) on dividend payments. According to DIPAM, PSUs are required to pay a minimum annual dividend of 30 per cent of profit after tax or 5 per cent of net worth, whichever is higher. The rating agency further said that this anomaly will have to be resolved and either the RBI will modify its draft circular or come up with a special provision for the government-owned NBFCs, or DIPAM will have to revisit their guidelines for dividend payments.

Meanwhile, it is believed that draft provisions on dividend payments will nudge NBFCs to accelerate the resolution of their stressed assets, otherwise their dividend payments will remain constrained. The NBFCs have received various support as India struggled through the coronavirus pandemic. From TLTRO 2.0 to additional liquidity, the NBFCs have been at the centre of government policies in recent months.