Source: ET
Context:
In a move to strengthen financial stability and curb excessive risk-taking, the Reserve Bank of India (RBI) has proposed a new prudential framework limiting banks’ exposure to capital markets and acquisition financing. The draft circular aims to ensure that banks maintain adequate capital buffers while supporting credit growth in India’s expanding economy.
Key Highlights of the Draft Norms:
Exposure Limits
- Aggregate Cap:
- The total direct exposure of banks to capital markets and acquisition financing will be capped at 20% of their Tier-1 capital.
- Sub-limits:
- Capital Market Exposure: Cannot exceed 40% of Tier-1 capital, including loans, guarantees, and fund-based exposures.
- Acquisition Financing: Restricted to 10% of Tier-1 capital to prevent overleveraging in corporate takeovers.
Rules for Acquisition Finance
- Banks may finance up to 70% of the acquisition value, while the acquiring company must contribute at least 30% from its own funds.
- Only listed entities with sound financials—positive net worth and profitability over the last three years—will be eligible.
- The acquisition loans must be fully secured by the shares of the target company.
Revised Norms for NBFC Exposure
RBI has also proposed lower risk weights for NBFCs’ infrastructure loans, particularly for well-established projects. This will likely reduce capital requirements for banks, enhancing credit availability to the infrastructure sector.
Significance:
- Ensures better capital discipline and risk diversification among Indian banks.
- Encourages responsible corporate financing amid a surge in M&A activity.
- Supports the infrastructure financing ecosystem by easing risk-weight norms for NBFCs.
- Reinforces RBI’s dual strategy of credit growth with financial stability.
