As the threat profile of NBFCs is altering at a quick pace, there was a will need for a regulatory framework for dividend declaration.
RBI’s most current draft on the declaration of dividends by non-banking economic corporations (NBFCs) may well support them in strengthening their balance sheet by enhancing leverage ratios and generating a buffer and surplus for fresh lending. RBI’s move will also support NBFCs in generating far better provisioning against the delinquent assets, stated a report by India Ratings. As the threat profile of NBFCs is altering at a quick pace, there was a will need for a regulatory framework for dividend declaration, the report added. The draft circular stated that non-deposit and systemically-essential NBFCs with capital-to-threat weighted assets ratio (CRAR) under 15 per cent and net NPAs above 6 per cent will not be in a position to spend any dividend.
NBFCs emerged as a critical segment through the pandemic as demand for credit has substantially improved in NBFCs. In order to infuse higher transparency and uniformity in practice, it has been decided to prescribe recommendations on the distribution of dividends by NBFCs, RBI stated.
However, the RBI draft circular does not commensurate with the recommendations issued by the Department of Investment and Public Asset Management (DIPAM) on dividend payments. According to DIPAM, PSUs are necessary to spend a minimum annual dividend of 30 per cent of profit following tax or 5 per cent of net worth, whichever is larger. The rating agency additional stated that this anomaly will have to be resolved and either the RBI will modify its draft circular or come up with a unique provision for the government-owned NBFCs, or DIPAM will have to revisit their recommendations for dividend payments.
Meanwhile, it is believed that draft provisions on dividend payments will nudge NBFCs to accelerate the resolution of their stressed assets, otherwise their dividend payments will stay constrained. The NBFCs have received a variety of assistance as India struggled via the coronavirus pandemic. From TLTRO 2. to extra liquidity, the NBFCs have been at the centre of government policies in current months.