How RBI's proposed restrictions may affect your dividends

• The Reserve Bank of India has proposed 15% capital adequacy as a benchmark and LIC Housing Finance is short of that.
• The new restrictions proposed by the regulator will also limit the amount of dividend paid by other non-banking finance companies.
• Check out the latest news and updates on Business Insider.

The Reserve Bank of India issued a draft circular that proposed restrictions on non-banking finance companies declaring dividends. And, according to analysis by Emkay, only two companies, LIC Housing Finance and M&M Financial Services, in that space do not meet the conditions, under current circumstances, for paying dividends set by the central bank. However, M&M Finance has clarified that it would be eligible.

Not surprisingly, it took a toll on the two stocks.

The RBI has proposed a capital to risk weighted assets ratio (CRAR) of 15%. Simply put, CRAR is a measure of how much capital the company has compared to the riskiness of its loans. If the borrower fails to repay, the capital would be the cushion to absorb the loss.

And LIC Housing Finance fails to meet the RBI threshold on this count. The capital adequacy ratio has been 14.4%% for the company in the last two financial years and 14.5% for the first half of the current one, the report said. The way out of this is that the company can raise money from the market to boost this figure past the 15% mark, and then, shareholders can expect a dividend.

M&M Financial, on the other hand, doesn’t make the cut on RBI’s benchmark for paying dividend because the amount of bad loans on its books is a little more than what the regulator likes. The circular has set the threshold at 4% while M&M Financial has a net NPA (non-performing assets) of 4.7%.

However, if the firm is able to recover enough loans by March 2021 to bring the metric below 4%, dividend may be back on the table. In the year before COVID-struck, the one ending in March 2019, the company paid a handsome 25.7% dividend to shareholders.

On the other hand, in a statement to Business Insider, M&M Financial stated “As per the circular, RBI has proposed a twin matrix of CRAR and NNPA and accordingly specified 4 categories based on a combination of both. CRAR of MMFSL has been above 18% for the last 3 years. Hence, the company will fall in Category B as per the matrix. Secondly, MMFSL’s net NPA at the end of September 30 was 4.7%, based on which our permissible dividend payout ratio is ‘up to 20%’,” the company said.

This is not the first time the spotlight has fallen on M&M Finance’s chunk of bad loans. The pandemic has only increased the risk of defaults and therefore the company too has been aggressively setting aside money to cover the losses if they occur. “As we progress, the next six months, which is normally the good six months, we would not see a decline in the gross NPA, and we will maintain our stance on aggressive provisions… if we start seeing things are not improving as we think, then we may take higher provision, whichever is necessary,” Vice Chairman and Managing Director Ramesh Iyer told Business Insider in an exclusive chat in July 2020.

Here’s an excerpt of that interview:

For other NBFCs that are eligible to pay dividend, there may be a cap on how much they can dole out based on the benchmarks set by the RBI. These are the likely limits on dividends given the current financial health of the following firms.

Source: Emkay

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