Central bank's proposals on dividend payouts weigh on state-owned NBFCs

The RBI has proposed that the payouts from next financial year will depend upon factors such as capital adequacy, non-performing asset ratio and leverage ratio.

Shares of state-owned REC, Power Finance Corporation (PFC), LIC Housing Finance, and M&M Financial Services (MMFS) fell around three per cent each on Thursday after the Reserve Bank of India (RBI) proposed to cap dividend payouts by non-banking financial companies (NBFCs).

Under the new rules, the dividend payouts will be dependent upon factors such as capital adequacy, non-performing asset (NPA) ratio and leve­rage ratio from the next financial year.

“Among the listed NBFCs, we expect PFC and REC to react negatively to the new rules as both the entities have a historic dividend payout of 45 per cent. As per new norms, they will be eligible for a 25 per cent dividend payout. Being high-dividend-yielding NBFCs had been one of the arguments in favour of these entities, which will be negatively affected by the new RBI rules,” said Emkay analysts Jignesh Shial, Anand Dama and Parth Sanghvi in a note.

Analysts said currently LIC Housing and MMFS fail to meet the proposed eligibility criteria for paying dividends.

“LIC Housing Finance, which has been struggling with lower capital adequacy for the last couple of years, fails to attain the first benchmark of minimum 15 per cent capital adequacy. However, as per an exception provided by RBI, the company could pay dividends if it raises capital during the current year. Similarly, MMFS fails to comply with net NPA norms (4.7 per cent as on Sep 20 against required 4 per cent), however, stronger recoveries during H2FY21 can allow the company to utilise this exception,” it said.

Analysts said most large NBFCs were better placed to meet the proposed norms. NBFCs have seen significant regulatory tightening since the IL&FS crisis in 2018.

“RBI has proposed to tighten regulations for NBFCs post the IL&FS crises. The regulator introduced LCR (liquidity coverage ratio) guidelines in the past year, capped HFC (housing finance company) leverage and has now prescribed dividend caps. RBI will likely tighten regulations for large NBFCs further. A ‘scale-based regulatory approach linked to the systemic risk contribution of NBFCs’ will be proposed in the next one month,” said a note by Kotak Institutional Equities.