RBI Introduces Framework for Banks to Finance Corporate Acquisitions in India: A Major Policy Shift

Indian banks have been requesting this policy change for quite some time.

Mumbai:

The Reserve Bank announced on Wednesday its plan to establish a framework enabling Indian banks to finance acquisitions by Indian corporations, aiming to enhance credit flow in the economy.

This development addresses a longstanding request from the Indian banking sector. Recently, State Bank of India Chairman C S Setty advocated strongly for allowing banks to fund mergers and acquisitions, similar to practices followed by international banking institutions.

"Initially, we will submit a formal request from the IBA to the RBI... beginning with listed companies where acquisitions are more transparent and receive shareholder approval. This approach would minimize concerns about funding hostile takeovers," Setty had explained.

During the presentation of the fourth bi-monthly monetary policy review, RBI Governor Sanjay Malhotra stated that the proposed framework would allow Indian banks to finance corporate acquisitions, effectively expanding the scope of capital market lending activities by banking institutions.

The plan includes removing regulatory limits on lending against listed debt securities and increasing the maximum amount for bank lending against shares from Rs 20 lakh to Rs 1 crore. Additionally, the limit for IPO financing will be raised from Rs 10 lakh to Rs 25 lakh per individual.

Malhotra also proposed withdrawing the 2016 framework that discouraged bank lending to specific borrowers with credit limits of Rs 10,000 crore or higher from the banking system.

He noted that while the Large Exposure Framework addresses credit concentration risk for particular entities or groups at the individual bank level, system-wide concentration risks would be managed through specific macroprudential tools when deemed necessary.

To reduce infrastructure financing costs for NBFCs, the RBI proposed lowering risk weights applicable to NBFC lending for operational, high-quality infrastructure projects.

Malhotra further mentioned that licensing for Urban Co-operative Banks (UCBs) had been suspended since 2004.

"Considering the positive developments in the sector over the past two decades and responding to growing stakeholder demand, we propose publishing a discussion paper on licensing new UCBs," he announced.