RBI’s dividend payout rules may have negligible impact on NBFCs
PremiumOn Thursday, RBI set certain conditions for non-bank lenders to pay dividends for the year through 31 March
The Reserve Bank of India’s (RBI) eligibility criteria on dividend payouts by non-banking financial companies (NBFCs) may have a limited impact as most large non-bank lenders meet the thresholds set by the regulator, experts said.
On Thursday, RBI set certain conditions for non-bank lenders to pay dividends for the year through 31 March. The regulator said the conditions, including minimum capital adequacy ratio and net non-performing asset (NPA) ratio, are specific to different categories of NBFCs. A non-bank financier must report a net NPA ratio of less than 6% in each of the last three years, including the financial year for which the dividend is proposed.
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“Over the past three years, dividend payout ratios have been about 10-20% for most entities, with few in the range of 20-30%," said Manushree Saggar, vice-president and sector head, Icra Ltd. Icra expects most NBFCs to comfortably meet the capital adequacy ratio criteria and the net non-performing asset (NPA) criteria for the past three years, Saggar said.
“The idea behind this guideline seems to be to ensure that NBFCs should be acting conservatively when the balance sheets are under significant pressure and thereby conserve capital and not distribute dividends to shareholders," said Prakash Agarwal, head (financial institutions), India Ratings and Research Pvt. Ltd.
Agarwal said that unless FY22 NPA numbers are extraordinarily bad, which is not the base case for India Ratings, he does not see large NBFCs getting constrained by the RBI notification.
On Thursday, RBI also specified separate capital adequacy norms for different categories of non-banks to be eligible for dividend payout. For instance, the adjusted net worth of a core investment company (CIC) should not be less than 30% of its aggregate risk-weighted assets, the guidelines said. For home financiers, the capital ratio should be a minimum of 13% as of 31 March 2020 and would increase by one percentage point each in FY21 and FY22.
An analysis by ICICI Securities showed that LIC Housing Finance’s FY21 capital adequacy ratio stood at 14.4%, though above regulatory levels, and has to be shored up to 15% by the end of FY22. Others such as Indiabulls Housing Finance, PNB Housing Finance, Can Fin Homes and Housing Development Finance Corp. Ltd were comfortably above 15% ahead of the FY22 deadline.
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Net bad loan ratios and capital adequacy ratios for most non-bank financiers in FY19, FY20 and FY21 were well within the guardrails prescribed by the central bank. These lenders have seen a dividend payout within the 50% prescribed by RBI, showed data compiled by analysts. To be sure, the guidelines will be effective for payouts from FY22, the current financial year, and performance metrics of this year will have to be factored in. In other words, non-bank lenders will have to comply with these directions for the last three years of FY20, FY21 and FY22.
First proposed by the RBI in the form of a draft circular in December last year, the RBI move is meant to infuse greater transparency and uniformity in dividend distribution. RBI governor Shaktikanta Das on 4 December pointed out the growing significance of NBFCs and their interlinkages with different segments in the financial system.
Analysts at Kotak Institutional Equities said there is a need for some clarity on dividend payout ratios. While RBI has not prescribed any cap on dividend payout for NBFCs that do not accept public funds and do not have any customer interface, the core investment company’s payout ratio is capped at 60%, the analysts said.
“Notably, Bajaj Finserv is NBFC CIC, which does not directly accept public funds and does not have customer interface. It is not clear if the 60% cap will be applicable. Historically, its payout ratio has anyway been lower at 12-40%," they said in a 24 June report.
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