Declaration and Dividend by NBFC

The Reserve Bank of India (RBI) in the notification DOR.ACC.REC.No.23/21.02.067/2021-22 dated June 24, 2021, provided the guidelines to be followed by NBFCs in regards to the Declaration of dividends.

These guidelines were issued with the motive of maintaining proper control and ensuring transparency in the business operations of the NBFCs. The guidelines have provided the Eligibility criteria, criteria for Dividend Payout Ratio, and Reporting requirements. 

To whom these guidelines shall apply?

These guidelines shall apply to all NBFCs.

What are the minimum prudential requirements to declare dividends by NBFCs as per the guidelines?

1. The criteria of Net NPA:

It must be less than 6% in each of the previous three years, including the financial year for which dividend is proposed to be declared (closing of such financial year)

2. The criteria of Capital Adequacy:

• The NBFCs [other than Standalone Primary Dealers (SPD)] must follow a regulatory capital requirement (provided in Annex I) for each of the previous three financial years. It shall also include the financial year for which the dividend is proposed. 
• The SPD must maintain a minimum CRAR of 20% for all the four quarters of the financial year for which the dividend is proposed.

3. Other criteria:

• The NBFCs must comply with Section 45 IC of the RBI Act, 1934. 
• HFCs shall comply with Section 29 C of the National Housing Bank Act, 1987.
• The NBFCs must be compliant with the earlier regulations/ guidelines as issued by the RBI.
• RBI or NHB shall not have placed any explicit restrictions on the declaration of dividends.

What are the conditions to be followed by NBFC (other than SPD) which does not meet the above defined prudential requirement for each of the last three financial years?

The NBFCs (other than SPD) which does not meet the above mentioned prudential requirement for each of the last three financial years, may be eligible to declare a dividend, subject to:

• Cap of 10% on the dividend payout ratio, along with the following conditions:
  • Fulfill the applicable capital adequacy requirement in the financial year for which dividend is proposed; and
  • Net NPA of less than 4% at the closing of the financial year.

What are the ceilings on Dividend Payout Ratio?

RBI has provided ceilings on Maximum Dividend Payout Ratio as:

1. For NBFCs not accepting public funds and not having any customer interface: No Maximum ceiling provided
2. For Core Investment Company: 60%
3. For Standalone Primary Dealers: 60%
4. Other NBFCs: 50%

What are the reporting requirements for NBFC declaring Dividends?

RBI has directed that NBFC-D, NBFC-ND-SI, HFC & CIC declaring dividend must:

• Communicate the details of dividend declared as per Annex-2 for the financial year,
• The details must be communicated within a fortnight after declaration of dividend,
• The details must be sent to the Regional Office of the Department of Supervision of the RBI/ Department of Supervision of NHB (as per jurisdiction).