Is it true that the RBI has started to tighten the regulation of NBFCs and what does that mean for Bajaj Finance, HDFC, LIC Housing and M&M Finance?

In the latest monetary policy, the RBI had announced that NBFCs would be regulated more stringently in terms of capital adequacy and asset classification norms. This would be applicable to the large deposit taking NBFCs and the systemically important ones.

On 09 December, the RBI announced more detailed guidelines on this front. Here are the highlights of what the new NBFC policy would entail.

· In the aftermath of the monetary policy announcement, the RBI has moved in quickly to tighten regulation of NBFCs.

· First pertains to dividends. Going ahead, only NBFCs with minimum 15% capital adequacy and gross NPAs below 6% for last 3 years will be eligible to declare dividends.

· The above rule will be applicable from FY21 and will apply to the more systemically important NBFCs to begin with and later be expanded.

· The RBI would make an exception in the case of dividend payments on the capital adequacy front if the gross NPAs were less than 4% of total lent assets.

· NBFCs can pay dividends only out of the profits of the current year and in any of the years the dividend payout ratio cannot exceed 50%.

· RBI has also added that deposit-taking NBFCs and systemically important entities should have CRAR of 15% for 3 years in succession, while other NBFCs should ideally have leverage of less than 3X.

· This regulation shift will force NBFCs to become more accountable like banks and get rid of the regulatory arbitrage.

Most of the names mentioned by you in the question are very large and established NBFCs backed by reputed business groups. They have been following such prudential norms even before these regulations came into place. In fact, it will be positive for the larger NBFCs as it will lead to greater consolidation and also reduce the cost of funds for larger NBFCs.