Keeping in view the increasing significance of NBFCs in the financial system, The RBI had decided to formulate guidelines on dividend distribution by NBFCs and the draft rules were proposed on December 9 2020
Major highlights of the draft..
Deposit taking NBFCs should have a Capital to Risk (Weighted) Assets Ratio (CRAR) of at least 15 per cent for last three years, including the year for which it proposes to declare dividend.. CRAR is the ratio of bank's capital to risk. Higher the CRAR, better capitalized the bank is.
Also, the net non-performing (NPA) asset ratio should be less than 6 percent in each of the last three years, including the year for which it proposes to declare dividend. NPA is basically the bad loans.. the lower, the better.
Non-Systemically Important Non-Deposit taking NBFC, that is NBFCs with total assets less than 500 crore, should have leverage ratio of less than 7 for the last three years, including the year for which it proposes to declare dividend. Leverage ratio indicates the debt. Obviously, the NBFC has to have low debt. to function smoothly.
How will it play out?
In accordance to a set of conditions, different categories of NBFCs would be allowed to declare dividend as per the given parameters. The proposed dividend should be paid out only from the NBFCs current year's profit.
Bottom line: Comments on the draft circular are invited from NBFCs, industry participants and other interested parties by December 24, 2020.