This Article is From Dec 10, 2020

RBI Draft Dividend Cap: NBFCs Can Handle Ratios By Raising Tier-II Capital, Says Report

RBI's Dividend Cap Proposal For NBFCs: The central bank has proposed to cap the dividend payout ratio for NBFCs at a maximum of 50 per cent

RBI Draft Dividend Cap: NBFCs Can Handle Ratios By Raising Tier-II Capital, Says Report

Payout ratio caps range from 15-50 per cent based upon the ratios of CAR and NPL

The Reserve Bank of India (RBI) released a draft circular on the dividend payout ratio caps for non-banking financial companies (NBFCs). The central bank has proposed to cap the dividend payout ratio for NBFCs at a maximum of 50 per cent. The dividend payout ratio will be based on capital adequacy ratio (CAR), net non-performing loan (NPL) for large players (NBFC-ND-SI and NBFC-D). Those NBFCs that have CAR below 15 per cent or net NPLs above 6 per cent are not eligible for paying dividend. The NBFCs have to comply with the requirement for three consecutive years (including the current fiscal) to be eligible for dividend payouts.

The payout ratio caps range from 15-50 per cent based upon the two ratios of CAR and NPL. The final guidelines will be introduced by RBI at a later stage. The current draft suggests that the guidelines will likely be applicable from fiscal year 2021 itself even though the NPL ratio will likely be high due to the COVID-19 pandemic.

According to a recent report by Kotak Institutional equities, most of the large NBFCs are well placed to meet the proposed dividend caps excluding LIC Housing Finance, Mahindra and Mahindra Finance, and Shriram Transport Finance.

  • Most covered companies well placed: Most large NBFCs are well placed to meet the proposed dividend caps excluding the LICHF, Mahindra and Mahindra Finance, and Shriram Transport Finance, if the guidelines are made applicable from the previous year.
  • Low CAR for LIC Housing Finance: All covered NBFCs excluding LIC Housing Finance comply with the CAR requirements of >15 per cent, most NBFCs need to maintain high capitalization levels to provide comfort to rating agencies and debt capital markets.
  • Some tools for non-compliance on margin: Most of the NBFCs can manage the ratios of CAR and net NPLs by raising tier II capital in case of non-compliance on the former or adjusting write-offs in case of deficit for the latter. NBFCs and housing finance companies (HFCs) can switch between NPL provisions and write-offs or increase coverage on gross non-performing loan (GNPLs) to comply with the net NPL requirements.
  • More in the way for large players: The central bank will likely tighten the regulations for large NBFCs further. A ‘scale-based regulatory approach linked to the systemic risk contribution of NBFCs will be proposed in the next one month.