A stitch in time – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/editorial/a-stitch-in-time/article35004562.ece

RBI’s norms for NBFC dividend payouts may not have an immediate impact, but signal emerging stress

In line with its stated objective of levelling the regulatory playing field between non-banking finance companies (NBFCs) and banks, Reserve Bank of India (RBI) has now laid down eligibility criteria for dividend declarations by NBFCs and also capped payouts. From this fiscal, most categories of NBFCs will be required to cap their dividend payout ratios at 50 per cent. To declare dividends, a NBFC should have reported a net NPA (non-performing asset) ratio of less than 6 per cent for the preceding three years. NBFCs that are systemically important, deposit-taking, engaged in microfinance or housing finance must also have met minimum capital adequacy of 15 per cent for the previous three years. NBFCs that aren’t systemically important should have leverage of less than seven times from FY16 onwards. NBFCs that don’t meet the norms need to cap dividend payouts at 10 per cent or skip them altogether. The boards of NBFCs will be responsible for ensuring that dividend payouts are prudent and comply with these rules.

The RBI’s decision to put out these guidelines now perhaps suggests that it apprehends a significant deterioration in NBFCs’ reported numbers in the quarters ahead. In that case, this pre-emptive move is welcome, as it could prevent NBFCs from unduly depleting their cash flows. The IL&FS and DHFL failures have certainly brought to focus the risks to a wide variety of stakeholders when large, inter-connected NBFCs land in financial trouble. The two waves of Covid have greatly added to the risks of the lending business by putting borrowers under income stress, necessitating loan moratoriums and obscuring the true picture on NPAs. But the only point is that, if the RBI does perceive a heightened risk of NBFC stress in the coming months, tightening their dividend payout policies alone may not be enough to head off renewed turbulence.

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