RBI Allows Banks to Fund M&A Activity

Mumbai, Oct 1 (PTI) In a bid to improve credit flow, the Reserve Bank on Wednesday said it would provide an enabling framework for Indian banks to finance acquisitions by Indian corporates.

This has been a long-pending demand of Indian banks. Recently, the State Bank of India Chairman C S Setty also made a strong case for permitting banks to provide funding for mergers and acquisitions, as done by global lenders.

"To start with, we will make a formal request from the IBA (to the RBI)... at least start with some listed companies where the acquisitions are more transparent and are approved by the shareholders. (Thus) The issue of any hostile takeover of the funding can be minimised," Setty had said.

Announcing the fourth bi-monthly monetary policy review, Reserve Bank of India Governor Sanjay Malhotra said it is proposed to provide an enabling framework for Indian banks to finance acquisitions by Indian corporates, thereby expanding the scope of capital market lending by banks.

It is proposed to remove the regulatory ceiling on lending against listed debt securities and enhance limits for lending by banks against shares from Rs 20 lakh to Rs 1 crore and for IPO financing from Rs 10 lakh to Rs 25 lakh per person, he said.

He also proposed to withdraw the framework introduced in 2016 that disincentivized lending by banks to specified borrowers (with a credit limit from the banking system of Rs 10,000 crore and above).

While the Large Exposure Framework put in place for banks addresses credit concentration risk to a particular entity or group at an individual bank level, he said, concentration risk at the banking system level, as and when considered necessary, will be managed through specific macroprudential tools.

In a bid to reduce the cost of infrastructure financing for NBFCs, he proposed lowering the risk weights applicable to lending by NBFCs to operational, high-quality infrastructure projects.

He further said licensing for Urban Co-operative Banks (UCBs) had been paused since 2004.

"Considering the positive developments in the sector during the last two decades and in response to the growing demand from the stakeholders, we propose to publish a discussion paper on licensing of new UCBs," he said.