RBI move on M&A funding may revive corporate credit demand

Also enable corporate sector to capture sizeable share of acquisition financing mkt

- SUBRATA PANDA & MANOJIT SAHA

Domestic banks are hopeful that the Reserve Bank of India’s (RBI's) decision to allow them to fund acquisitions by Indian companies will not only boost credit demand from the corporate sector, but will also enable them to capture asizeable share of the acquisition financing market, which so far has been dominated by non-banks, private credit funds, and foreign banks, as banks have a lower cost of funds.

It alsocomesatatime when the share of bank credit to corporates has declined significantly.

Last week, RBI Governor Sanjay Malhotra announced 22 measures aimed at boostingcredit flowstothe real economy and promoting ease of doing business while lowering banks’ costs. These include a nod for banks to fund acquisitions of Indian non-financial sector companies.

This has been a longstanding demand of the banking sector, especially as corporates are increasingly turning to alternative sources of funds, including the domestic and overseas debt capital markets, and the equity market, for their capex needs, leading to an overall slowdown in credit growth in the system.

Indian banks have been historically 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.

Meanwhile, bankers _ feel acquisition financing could follow the path of infrastructure financing, where a few large banks develop expertise, and smaller banks piggyback on their capabilities by taking smaller exposures.