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A lucrative business segment has been opened up for banks in India — financing mergers & acquisitions (M&As). It has thus far been the exclusive stomping ground of foreign banks (even though its funding remains offshore — as in, it’s not on their rupee book), and a few select shadow banks. This is set to change with Mint Road’s draft on “Commercial banks: Capital market exposure”.
While there’s no sizing study on the M&A business (which is part of the wider investment banking suite), banks — irrespective of the colour of their capital — will get to have more elbow room. M&As are set to reshape India Inc — as on date, annual deal volumes are well above the $100 billion mark. This, of course, will call for rewiring banks (once the operational guidelines are issued) when they step into the trade. It will segue lenders with a collateral-backed legacy with the equities markets.
Mint Road is understandably cautious. Its draft states banks’ aggregate M&A finance exposure is not to exceed 10 per cent of their Tier-I capital; it’s to be made available only to listed companies with a “satisfactory” net worth and profit-making record of three years. And, they can finance only up to 70 per cent of the acquisition value; the rest is to be brought in by the acquirer as equity using its funds. It’s clear that only the bigger banks will get to play a meaningful role in this area. What is interesting is that the Reserve Bank of India (RBI) issued its draft on the subject in double-quick time. In August, State Bank of India (SBI) Chairman C S Setty had lifted the veil on a subject long spoken of in corporate corridors: “Why can’t our banks finance M&As?” And, the Indian Banks’ Association (of which Setty is the chairman) is to “make a formal request” to Mint Road to make way for it. Two months down the line, you had the draft issued for feedback from stakeholders. Things are surely changing fast.
Out with the old
A far-reaching reform measure which has not got the attention it merits is Mint Road’s setting up the Regulatory Review Cell (RRC). It will be housed in the Department of Regulation (effective October 1, 2025). The mandate: to ensure that regulations are subject to a comprehensive and systematic internal review every 5-7 years. What it tells you is that Mint Road has taken a long-term view — that such an exercise cannot be episodic, that too in a fast-changing financial world with technology altering business models. This is a future wherein both regulated entities and the regulator will be on a steep-learning curve.
A closer reading informs you of the scope of its coverage — not just banks (be it state-run, private or small finance banks), but also non-banking financial companies (NBFCs), and urban cooperative banks.
Now, a criticism frequently directed at Mint Road is that its consultative process comes across as perfunctory. Drafts for industry feedback and the operational circulars later on are more or less the same. The regulator appears to have taken this sensitivity into consideration. So, in order to strengthen stakeholder engagement in the regulatory process and leverage industry expertise on a continued basis, an independent advisory group on regulation has been formed concurrently. It comprises external experts, to channel industry feedback into the periodic review of regulations through the RRC.
What has to be read into it is that RBI governor Sanjay Malhotra (and his key aides) is ensuring that the regulatory reform momentum set in motion by his predecessor is not squandered. Former Governor Shaktikanta Das had set up the second Regulation Review Authority (RRA: 2.0) in November 2021 (it gave its recommendations in June 2022.) This came two decades after Y V Reddy as deputy governor set up the first RRA in 1999 (he was appointed Governor on
September 6, 2003, and served in the position for five years.)
Taking fresh cover
The RBI’s Central Board of Directors has approved the risk-based deposit insurance framework for banks at its 620th meeting. This marks the most significant shift in the post-reform period. Think of it as tightening the screws on banks’ liability side. Going forward, the premium paid by banks to the Deposit Insurance and Credit Guarantee Corporation (DICGC) to secure deposits will be linked to their risk profile. Again, it is not that the weaker-rated banks will shell out more than the current uniform premium of 12 paise for every ₹100 of deposits. This will be the cap, and the better-rated banks will pay lower.
What’s less known is this architecture — radical as it may appear — is not a new concept. It was flagged by the Jagdish Capoor (he was a former deputy governor of RBI) working group on Reforms in Deposit Insurance, 1999; the Committee on Credit Risk Model, 2006 (set up by the DICGC); and the Jasbir Singh Committee on Differential Premium System for Banks, 2015. Incidentally, the Singh committee was set up after the issue of risk-based premium was discussed at the RBI’s board meeting held on October 16, 2014.
It was also felt DICGC could “explore the possibility of putting in place a differential premium within the cooperative sector linking it to governance and risk profile of cooperative banks.” The RBI has decided to revisit this last-mentioned aspect of deposit insurance as well. The mess at the Mumbai-based New India Cooperative Bank in early 2025 had put the spotlight on it. M Nagaraju, secretary, Department of Financial Services, had also said that a hike in the sum covered is under consideration. This is speculated to move up to ₹15 lakh from the current ₹5 lakh.
It again tells you that course corrections will not be episodic; Mint Road is for taking longer-term positions with periodic reviews. As M Rajeshwar Rao, former deputy governor of the RBI, noted (August 19, 2024), a growing and formalising economy can naturally be expected to see a sharp increase in both primary and secondary bank deposits, “driving a wedge between the desirable insurance reserve requirement and the available reserve”. And, considering multiple factors like growth in the value of bank deposits, economic growth rate, inflation, increase in income levels, etc, “a periodical upward revision of this limit may be warranted”. If an upward revision in the sum covered were to come through down the line, it would be quickest in the post-reform period: after 1993, it has moved northwards only once (in February 2020) compared to the four times between 1968 (first hike) and 1980. DICGC was set up in 1962.
New UCB licences
The urban cooperative bank (UCB) space was in the spotlight. After a two-decadal break, new UCB licences are to be issued. The health of this sector has vastly improved.
Flashback: The number of UCBs surged in the 1990s on the back of a liberal licensing policy. Over the years, nearly a third of the newly-licensed lot became financially unsound. Starting FY04, RBI initiated a process of consolidation. This included amalgamation of unviable UCBs with their viable counterparts, closure of non-viable entities and suspension of issuance of new licences. As a result, the number of UCBs fell to 1,472 in FY24 from 1,926 in FY04. The move to licence new UCBs is also a key step towards realising the “Delhi Declaration 2025” (in November) adopted at the international conference — “Co-Op Kumbh 2025” — organised by the National Federation of UCBs and Credit Societies. This is to serve as a roadmap for the expansion of UCBs. Within the next five years, an UCB is to be established in every city with a population of over 200,000.
Union Home Minister and Minister of Cooperation Amit Shah said that UCBs must carry out their core functions with a multi-sector approach for the empowerment of young entrepreneurs, self-help groups, and the weaker sections of society. The goal: It has to be a win-win game here on.
SROs settle in
A tad over two years after Mint Road flagged the need for a self-regulatory organisation (SRO) architecture, the building blocks are in place. Sharing space with legacy SROs (Sa-dhan, and the MicroFinance Institutions Network), you now have The Fintech Association for Consumer Empowerment, the Unified Fintech Forum (which is the rebranded Digital Lenders Association of India), the Finance Industry Development Council, and Fixed Income Money Market and Derivatives Association of India.
Account aggregators, business correspondents and UCBs are also planning to have SROs for their respective sectors. The Business Correspondent Forum of India is to partner with the India Fintech Forum to co-create a stronger SRO. For industry support, it has teamed up with the Internet and Mobile Association of India and formed a chapter with their help: IAMAI-BCFI. UCBs plan to make the National Urban Co-operative Finance & Development Corporation an SRO. An issue which has not been addressed is the coordination between SROs. Is there to be a mirror image of the Financial Stability and Development Council set up in December 2010 — the coordinating agency for financial regulators — chaired by the finance minister?
A booster dose for customer grievances
Mint Road is forcing banks to address an issue which has long been relatively low on their priorities, or inadequate. It has announced a special two-month campaign to clear all customer grievances that have been pending with the RBI ombudsman for more than a month. The drive will run from January 1 to February 29 next year.
RBI Governor Sanjay Malhotra noted that while the central bank has already implemented several initiatives to enhance customer experience (such as simplifying re-KYC, improving financial inclusion processes, launching the “Aapki Poonji, Aapka Adhikar” awareness programme, and making all RBI service applications fully online), there has been a recent spike in customer grievances reaching the ombudsman.
The RBI is following through on its plans, as mentioned in its annual report (FY24): “… conduct a survey to assess the reasons for the low level of complaints in the rural and semi-urban areas.” It had noted that the low level of grievances may be an indication that customers in these geographies may not be aware of the addressal mechanisms. The report also said the central bank will review and roll out a reoriented nationwide intensive awareness programme based on feedback received from regulated entities, and offices of the RBI ombudsman, and further improve the complaint management system to enhance support in lodging complaints and ensure greater consistency in decisions and outcomes.
But the runaway growth in retail credit has put the spotlight on an issue which has still not got the attention it deserves: A body which can bat on behalf of consumers at the national level (outside of the regulator) to offer guidance, mediate disputes and promote awareness about responsible borrowing. The new-to-credit segment and many in the rural and semi-urban areas lack conventional identity documents such as passport, PAN card, or driver’s licence. They also may not be financially literate.
In the post-pandemic phase, the RBI’s Financial Stability Report (June 2024) noted, “Financial liabilities of households have risen in the post-pandemic period, as reflected in the surge in retail loan growth for financing both consumption and investment.”
Taking stock
- Special two-month campaign launched to clear customer grievances pending with the RBI ombudsman for more than a month
- This campaign will run from Jan 1 to Feb 29 next year
- There has been a recent spike in customer grievances reaching the RBI ombudsman
- Mint Road is following through on its plans to further improve the complaint management system and ensure greater consistency in decisions and outcomes
