RBI allows local lenders to bankroll mergers & acquisitions

In a step to expand opportunity, the Reserve Bank of India (RBI) Wednesday proposed a comprehensive framework that would allow banks to finance acquisitions by Indian corporates. This was a long-standing demand by domestic banks.

The central bank also announced plans to increase lending limits against shares, and proposed to ease risk weights on loans extended by banks to non-banking financial companies (NBFCs) for operational infrastructure projects.

“It is proposed to provide an enabling framework for banks to finance acquisitions by Indian corporates, enhance the limit for lending by banks against shares, units of REITs, units of InvITs, while removing the regulatory ceiling altogether on lending against listed debt securities; and put in place a more principle-based framework for lending to capital market intermediaries,” the RBI said.

These measures are expected to broaden the scope of capital market lending by banks and other regulated entities. Draft guidelines for these proposals will be issued shortly.

Currently, while foreign banks can extend acquisition financing to Indian corporates, domestic banks are restricted from offering loans for the acquisition of shares.

Capital market exposures including loans against securities to individuals and to capital market intermediaries have so far been governed by strict prudential norms such as sectoral exposure limits, single borrower limits, and margin requirements.

The RBI explained that the proposed relaxations are justified by the substantial growth and maturation of India’s capital markets, alongside a strengthened banking system in recent years.

Separately, the regulator also proposed to withdraw the guidelines on Enhancing Credit Supply for Large Borrowers through Market Mechanism, introduced in August 2016. These guidelines aimed to mitigate concentration risk stemming from the banking sector’s aggregate exposure to a single large corporate borrower and to encourage large corporates to diversify their funding sources.

The RBI clarified that the existing Large Exposure Framework will continue to address such risks at the individual bank level. A draft circular on the withdrawal of these guidelines will also be released for public feedback.

Also, to align infrastructure lending risk weights with the actual risk profile of operational projects, the RBI announced a shift towards a principle-based framework for non-bank financial institutions. This approach seeks to enable more accurate risk assessment and more efficient capital allocation in the infrastructure lending space.