India Ratings and Research (Ind-Ra) opines the Reserve Bank of India’s recent draft circular (dated 9 December 2020) prescribing guidelines on dividend pay-out by non-banking financial companies (NBFCs), based on capitalisation (CRAR) and net NPA ratio, would not be onerous for most non-banks. While the guidelines do not explicitly include housing finance companies (HFCs), factoring that they have been considered as form of NBFCs under RBI guidelines, Once operational, these guidelines could be applicable for HFCs as well.
Ind-Ra has analysed the dividend pay-out ratio (DPR) of the top 24 NBFCs and HFCs. If these guidelines were to be applicable for FY20 dividend pay-outs, five of these companies would have been required to taper down their dividend payments.
Figure 1
Permissible DPR is arrived based on the attached matrix.
NBFCs have been strengthening their capitalisation levels, while majority of them are fairly well placed; 19 out of 24 largest NBFCs and HFCs reported their CRAR above 18% at end-FY20. Furthermore, few NBFCs have raised equity in FY21 to strengthen their capitalisation levels. Also, most NBFCs can augment CRAR by raising additional tier 2 capital, if required, within the permissible limit given the scope.
Figure 2 Figure 3
The guidelines on net NPA, however, could be more challenging for some NBFCs, especially for few vehicle finance companies, in case they aspire for a higher dividend payment, though their dividend payments have been mostly in a moderate range. As for HFCs, given that generally their slippages have been lower, the net NPA requirement is unlikely to pose any significant challenge. Having said that, the impact of pandemic is still unfolding and asset quality across spectrum is likely to deteriorate.
The agency also believes that FY21 profitability of non-banks would be subdued and the companies may want to conserve capital.
The RBI draft circular on NBFCs’ dividend declaration is another step in direction to bring similarity between regulations of banks and non-banks. The regulations prescribes the range of dividend pay-out ratio for banks depending on capitalisation and net NPA ratio and is caped at40%. As per the RBI draft circular, the dividend pay-out ratio for NBFCs would be between range of 15% to 50% and would be capped at 50%. The dividend pay-out ratio will be based on (a) capital adequacy ratio (CAR) and (b) net NPA ratio. Non-deposit taking systemically important NBFCs, having CAR below 15% or net NPA above 6%, would not be able to pay any dividend.
Figure 4
Matrix for Criteria of Maximum Permissible Range of Dividend Pay-out Ratio |
|
|
|
Net NPA Ratio |
|
Category |
CRAR |
Zero |
More than zero but less than 2% |
From 2% to less than 4% |
From 4% to less than 6% |
|
y |
|
Range of Dividend Pay-out Ratio |
|
A |
20% or more for each of the past three years* |
Up to 50 |
Up to 45 |
Up to 35 |
Up to 25 |
|
B |
18% to less than 20% for each of the past three years* |
Up to 45 |
Up to 40 |
Up to 30 |
Up to 20 |
|
C |
15% to less than18% for each of the past three years* |
Up to 40 |
Up to 35 |
Up to 25 |
Up to 15 |
|
D |
15% or more in the accounting year for which dividend is to be declared |
Up to 15 |
Up to 10 |
Nil |
* including the accounting year for which it proposes to declare dividend
Source: Draft circular on Declaration of Dividend by NBFCs, dated 9 December 2020, Ind-Ra |