Mumbai: The Reserve Bank of India (RBI) recently announced plans to enhance credit access for Indian banks, specifically to support corporate acquisitions. This move comes after years of requests from banks for more flexibility in financing mergers. Recently, C S Setty, the Chairman of the State Bank of India, emphasized the need for banks to fund acquisitions, similar to what many global lenders already do.
Setty suggested that banks start by focusing on listed companies, where transactions are clearer and easier for shareholders to approve. This approach could also help prevent hostile takeovers.
During the latest monetary policy review, RBI Governor Sanjay Malhotra revealed proposals to broaden how banks can lend for acquisitions. Key changes may include lifting limits on funding against listed debt securities and increasing lending caps for shares and IPO financing. For instance, the loan limit for shares will rise from ₹20 lakh to ₹1 crore.
Additionally, the RBI intends to remove some regulations that have previously discouraged banks from lending to significant borrowers. The goal is to strike the right balance between managing risk and encouraging lending.
This new direction could also affect non-banking financial companies (NBFCs). Malhotra highlighted plans to lower the risk weights for loans given to high-quality infrastructure projects, potentially making it cheaper for these firms to finance important developments.
He also mentioned that licensing for Urban Co-operative Banks, which has been on hold since 2004, may soon be back on the table. With the banking landscape evolving over the past two decades, there’s a growing call to revisit these licensing rules.
In the context of current economic conditions, around 65% of small businesses in India report difficulties in accessing credit, according to a recent survey by the National Small Industries Corporation (NSIC). As these new rules take shape, they could significantly impact both corporate growth and small business financing.
Critics and supporters alike are watching closely. As the banking sector adapts, opinions vary on whether these changes will truly level the playing field or if they will lead to more concentrated risks within the banking system.
These developments mark a pivotal moment for Indian finance, aiming to create a more supportive environment for both banks and businesses alike.
For more insights into banking policies, you can check the RBI’s official communication here.
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RBI GOVERNOR SANJAY MALHOTRA, MONETARY POLICY, RBI, RBI TO PERMIT BANKS TO FUND MERGER & ACQUISITION ACTIVITY BY INDIAN CORPORATES
