What is in news : Reserve Bank of India (RBI) has decided to prescribe guidelines on distribution of dividend by NBFCs in order to induce a greater transparency and uniformity in practice.

Details :

• Guidelines will be effective for the declaration of dividend from profit for financial year 2021-2022 and onwards.
• Board of directors will consider the proposals for dividend.
• They will take into account the supervisory findings of Reserve Bank (National Housing Bank for HFCs) on divergence in classification and provisioning of non-performing assets (NPAs).
• Board will also ensure that total dividend proposed for financial year does not exceed ceilings as specified in these guidelines.
• As per circular, RBI will not entertain any request for ad-hoc dispensation on declaration of dividend.

How can NBFCs comply with guidelines?

• Net NPA ratio should be less than 6% in each of last three years as well as at the close of financial year for which dividend is being proposed.
• For NBFCs, that do not accept public funds & do not have any customer interface, no specific ceilings on dividend payout have been set.
• Maximum dividend payout ratio for core investment companies has been set at 60%, standalone primary dealers at 60% and for other NBFCs at 50%.

Non-Banking Financial Companies

• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
• A non-banking institution which is a company and has a principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company).

What is the difference between banks & NBFCs

NBFCs lend and make investments, and hence their activities are akin to that of banks; however, there are a few differences as given below:

• NBFC cannot accept demand deposits
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks
• Unlike Banks which are regulated by the RBI, the NBFCs are regulated by multiple regulators; Insurance Companies- IRDA, Merchant Banks- SEBI, Micro Finance Institutions- State Government, RBI and NABARD
• The norm of Public Sector Lending does not apply to NBFCs
• The Cash Reserve Requirement also does not apply to NBFCs