RBI 'enabling framework' to enable banks to finance domestic firms' M&A

Indian banks are barred from such lending, pushing companies to rely on shadow lenders or bonds for financing

The Reserve Bank of India (RBI) will provide an “enabling framework” for banks to finance acquisitions by Indian corporates, said Governor Sanjay Malhotra on Wednesday.

 

Allowing acquisition financing has been a long-standing ask of Indian banks, particularly as credit to industry has slowed significantly while corporates rely on alternative sources of funds for their capital expenditure activities.

 

“…to expand the scope of capital market lending by banks, it is proposed to provide an enabling framework for Indian banks to finance acquisitions by Indian corporates”, said Malhotra in his monetary policy statement.

 

C S Setty, chairman of State Bank of India (SBI), had said in August that the Indian Banks Association, which represents the management of the banking sector and financial institutions, will formally request the RBI to allow domestic banks to finance mergers and acquisitions (M&As) of Indian corporates, beginning perhaps with listed companies, where acquisitions are more transparent and approved by shareholders.

 

Indian banks are barred from lending for mergers and acquisitions, pushing companies to rely on non-banking financial companies or bonds to finance such deals.

 

While banks are restricted, non-banking financial companies, private equity firms, and foreign lenders often step in to finance such deals.

 

Malhotra also 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 initial public offering financing from Rs 10 lakh to Rs 25 lakh per person.

 

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