Banks can now fund India Inc’s M&A drive

BOOSTING DEALS MARKET

- SUBRATA PANDA

The Reserve Bank of India (RBI) on Wednesday met the longstanding demand of banks by allowing them to finance acquisitions by Indian companies, a move that also expands banks’ capital market lending in the country.

“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 companies,” said Sanjay Malhotra, governor, RBI.

Banks had made representations to the RBI to allow acquisition financing, particularly as credit to industry has slowed significantly, with corporates relying on alternative sources of funds for their capital expenditure activities.

In August, CS Setty, chairman, State Bank of India (SBI), had said that the Indian Banks Association 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 generally restricted from lending for mergers and acquisitions, as such financing can lead to over-leverage, promoter-level funding at the holding company level, and may not directly contribute to asset creation or growth. As a result, companies often turn to non-banking financial companies, private equity firms, or foreign lenders to fund these deals.

“allowing of M&A financing by Indian banks is growth accretive and will foster incremental credit flow from banks,” said Setty.