Strength of capital, quality of assets form central norms
MUMBAI/December 09-2020: The new criteria proposed by Reserve Bank of India (RBI) for non-banking finance companies (NBFCs) to qualify for dividend pay-out have more to do with the historical strength of capital and quality of assets rather than the profitability.
On December 4, while announcing the latest monetary policy, the RBI Governor, Shaktikanta Das, had said that the growing significance of NBFCs and their inter-linkages with different segments in the financial system has made it imperative to enhance the resilience of the sector.
New set of criteria
The new set of criteria includes minimum capital adequacy ratio (CAR), leverage ratio, the ceiling on net non-performing assets (NPA), lower threshold for adjusted net worth, etc.
And the gradation of criteria varies with the different categories of NBFCs. RBI said that the new proposals are also intended to “infuse greater transparency and uniformity in practice.”
The proposals were released in the form of a draft circular and comments have been sought by December 24.
From April 1
“The said guidelines will be applicable for dividend to be declared for the financial year beginning April 1, 2020 (FY21) onwards,” the RBI statement said.
The deposit-taking NBFC and systemically important non-deposit taking NBFC should have a capital adequacy ratio of at least 15 per cent for last three years, including the accounting year for which it proposes in order to qualify for declare pay-out.
The RBI said that a non-systemically important non-deposit taking NBFC should have leverage ratio of less than seven for the past three years, whereas a core investment company (CIC) should have adjusted net worth 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.
Net NPA ratio
Further, their net NPA ratio should be less than 6 per cent in each of the prior three years, in order to qualify for dividend distribution.
However, if the capital adequacy, leverage or net worth norms are not met in the last two years, non-banks would still be able to pay some dividend provided their net NPA ratio is less than 4 per cent in the accounting year.
Moreover, the financial statements pertaining to the year for which the NBFC is declaring dividend should be free of any ‘qualifications’ by the company’s auditors, which have an adverse bearing on the profit during that year, RBI said.
“In case of any ‘qualification’ to that effect, the net profit should be suitably adjusted while computing the dividend pay-out ratio,” it said.
