Context:
The RBI has introduced its most comprehensive reforms in bank lending, targeting both corporate and individual borrowers. The aim is to reverse disintermediation (where companies bypass banks for funding), strengthen capital markets, and support economic growth.
Key Reforms and Implications
Corporate Lending and Acquisitions
- Banks can now finance mergers and acquisitions, reducing the cost of corporate takeovers.
- This encourages leveraged buyouts and supports a strong pipeline of new issues, improving corporate access to capital.
- Bank credit growth has lagged behind economic growth; these measures aim to expand banks’ corporate lending books.
Lending to Large Companies
- Withdrawal of the 2016 lending cap framework will allow banks to lend more flexibly.
- Freed resources can be directed to productive economic activity, such as infrastructure and MSMEs.
Individual Investor Lending
- Higher caps on loans for individuals investing in IPOs and shares will maintain investor interest in emerging and high-performing companies.
- This also improves liquidity in the equity market.
Risk Management and Prudential Measures
- Lower risk weights for infrastructure loans support ongoing capex projects.
- Ceilings on lending against debt securities removed, allowing banks more flexibility.
- RBI is shifting towards macroprudential regulation, focusing on systemic risk rather than punitive lending limits.
- Phased transition to international credit risk frameworks ensures minimal disruption.
External Commercial Borrowing (ECB) and Export Credit
- Revised ECB norms will expand the pool of eligible borrowers and lenders, relax borrowing limits, and simplify reporting.
- Export credit rules are being eased to improve ease of doing business.
