‘Neutral-to-Positive Impact of RBI’s Draft Circular on Govt-Owned NBFCs’

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The Reserve Bank of India’s (RBI’s) recent draft circular on declaration of dividends by non-banking financial companies (NBFCs) will have a neutral-to-positive impact on government-owned NBFCs, India Ratings and Research (Ind-Ra) said.

This is because the move will help them in strengthening their balance sheet by improving their leverage ratios and creating a buffer or reserve and surplus for fresh lending. It will also help them in creating better provisioning against the delinquent assets.

As the risk profile of NBFCs is changing at a fast pace, there was a need for a regulatory framework for dividend declaration. The role of NBFCs in economy is increasing with the rising demand for credit, said Ind-Ra.According to the draft circular, non-deposit and systemically-important NBFCs with capital-to-risk weighted assets ratio below 15 per cent and net non-performing advances above 6 per cent will not be able to pay any dividend.

Ind-Ra said the RBI draft circular, however, does not gel with the guidelines issued by Department of Investment and Public Asset Management (DIPAM) on dividend payments.

According to DIPAM, central public sector enterprises are required to pay a minimum annual dividend of 30 per cent of profit after tax or 5 per cent of net worth whichever is higher. This anomaly will have to be resolved.

Ind-Ra said either the RBI will modify its draft circular or come up with a special provision for the government-owned NBFCs or DIPAM will have to revisit their guidelines for dividend payments.

The draft provisions on dividend payments will nudge NBFCs to accelerate resolution of their stressed assets, said Ind-Ra. Otherwise their dividend payments will remain constrained.

SMEStreet Edit Desk

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