The Reserve Bank of India (RBI) on Friday released a draft circular proposing limits on banks’ exposure to capital markets and acquisition finance, aimed at strengthening financial stability and promoting prudent lending practices.
Under the draft guidelines, banks’ total direct investments in capital markets and acquisition finance must not exceed 20% of their tier 1 capital.
Additionally, the RBI proposed that the aggregate capital market exposure of banks should not exceed 40% of their tier 1 capital.
Tier 1 capital, considered the highest-quality capital of a bank, includes equity, retained earnings, and certain instruments capable of absorbing losses, ensuring that banks have a strong financial foundation.
Proposed Rules for Acquisition Finance: Limits and Conditions
The RBI also outlined detailed rules for acquisition finance. Key proposals include:
RBI’s Broader Measures to Boost Bank Lending
Earlier this month, the RBI allowed banks to fund acquisitions and raised the cap on loans for buying shares at initial public offerings (IPOs).
These steps are part of a series of measures to encourage bank lending and investment in India, the world’s fifth-largest economy.
The regulator’s latest draft circular signals its focus on balancing financial growth with risk management, ensuring that banks continue to lend prudently while supporting economic expansion.
Inputs from agencies
Under the draft guidelines, banks’ total direct investments in capital markets and acquisition finance must not exceed 20% of their tier 1 capital.
Additionally, the RBI proposed that the aggregate capital market exposure of banks should not exceed 40% of their tier 1 capital.
Tier 1 capital, considered the highest-quality capital of a bank, includes equity, retained earnings, and certain instruments capable of absorbing losses, ensuring that banks have a strong financial foundation.
Proposed Rules for Acquisition Finance: Limits and Conditions
The RBI also outlined detailed rules for acquisition finance. Key proposals include:
- Aggregate exposure limit: A bank’s total exposure towards acquisition finance must not exceed 10% of its tier 1 capital.
- Financing structure: Banks may finance up to 70% of the deal value, while the acquiring company must fund at least 30%.
- Eligibility criteria: Acquisition finance can be offered only to listed companies with satisfactory net worth that have been profitable for the last three years.
RBI’s Broader Measures to Boost Bank Lending
Earlier this month, the RBI allowed banks to fund acquisitions and raised the cap on loans for buying shares at initial public offerings (IPOs).
These steps are part of a series of measures to encourage bank lending and investment in India, the world’s fifth-largest economy.
The regulator’s latest draft circular signals its focus on balancing financial growth with risk management, ensuring that banks continue to lend prudently while supporting economic expansion.
Inputs from agencies
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