“The Reserve Bank of India’s recent draft circular prescribing guidelines on dividend payout by non-banking financial companies (NBFCs), based on capitalisation (CRAR) and net NPA ratio, would not be onerous for most non-banks,” India Ratings and Research said in a report.
Under the proposed norms, only those NBFCs that meet the prescribed prudential requirements would be allowed to declare and distribute dividends.
One of the norms prescribed by the RBI is that the net non-performing asset (NPA) ratio of NBFCs should be less than 6 per cent in each of the last three years, including the accounting year for which it proposes to declare dividend.
On capital adequacy and leverage, the draft said deposit-taking NBFCs and systemically important non-deposit-taking NBFCs should have the capital-to-risk weighted assets ratio (CRAR) of at least 15 per cent for the past three years, including the accounting year for which it proposes to declare dividend.
Non-systemically important non-deposit-taking NBFCs should have a leverage ratio of less than seven for the last three years, including the accounting year for which it proposes to declare dividend.
Core investment company (CIC) should have adjusted net worth (ANW) of at least 30 per cent of its aggregate risk-weighted assets on balance sheet and risk-adjusted value of off-balance sheet items for the past three years, including the accounting year for which it proposes to declare dividend, according to the draft guidelines.
The agency said while the guidelines do not explicitly include housing finance companies (HFCs), factoring that they have been considered as a form of NBFCs under RBI guidelines, once operational, these guidelines could be applicable for HFCs as well.
It analysed the dividend payout ratio (DPR) of top 24 NBFCs and HFCs.
“If these guidelines were to be applicable for FY20 dividend payouts, five of these companies would have been required to taper down their dividend payments,” the rating agency said.
NBFCs have been strengthening their capitalisation levels and the majority of them are fairly well placed, it said.
Out of the 24 largest NBFCs and HFCs, 19 reported their CRAR above 18 per cent at end-FY20, it said. 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,” the report said.
The agency further said the proposed 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, it said.
“Having said that, the impact of the pandemic is still unfolding and asset quality across the spectrum is likely to deteriorate,” the agency added.
It also believes that FY21 profitability of non-banks would be subdued and the companies may want to conserve capital.
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