MUMBAI: The massive reform strokes that the Reserve Bank has announced Wednesday to oil the credit flow to the economy by easing a host of restrictive regulations of the past can lead to incremental credit demand in the north of around Rs 5.7 trillion a year—just from easing the large exposure caps and allowing banks fund mergers and acquisitions and, shows an analysis.
As part of the monetary policy announcements, the governor Sanjay Malhotra has announced as many as 22 amendments in a reform flourish that would go to help the public, companies and more importantly banks. He said regulatory easings are aimed at strengthening the resilience and competitiveness of the banking sector, improving credit flow, promoting ease of doing business, simplifying forex management, enhancing consumer satisfaction, and internationalisation of the rupee that has been bleeding for long.
The biggest credit booster is the proposal to withdraw the 2016 framework that disincentivised banks from lending to large borrowers (with credit limit from banking system at Rs 10,000 crore and above) could boost corporate bank credit to a considerable extent. This is important as corporate credit has been the biggest missing cog in the banking growth story for many years now.
“Incremental corporate borrowing, including bonds, commercial papers and external commercial borrowings, was around Rs 30 trillion in FY25. If we assume 10-15% come back to the banking system it has the potential for banks to lend an additional Rs 3-4.5 trillion towards (based on the FY25 market size) meeting corporate demands, subject to pricing of risks,” Soumya Kanti Ghosh of SBI Research said in a note.
According to him the next big booster is allowing bank funding for merger and acquisitions, which so far has been exclusively a playing field for foreign banks/large NBFCs as also PE/VC firms. And according to him, “the regulatory green lighting of acquisition financing promises to unlock value in corporate funding life cycle to the tune of Rs 1.2 trillion annually, going by FY24 market size.”
“M&A deals in FY24 were valued at over $120 billion or Rs 10 trillion. Assuming a debt component of 40% of each M&A and 30% of this could be financed by banks, this translates into a potential credit growth of Rs 1.2 trillion,” Ghosh said, and described these reforms as helping our banks with strong balance-sheets “to look beyond the generic banking themes and expand the economy of scope by offering services in lucrative areas that have hitherto been exclusively a playing field for foreign banks/large NBFCs as also PE/VC firms and the regulatory green lighting of acquisition financing promises to unlock value in corporate funding life cycle.”
The RBI has proposed to remove the regulatory ceiling on lending against listed debt securities and enhance limits for lending by banks against shares from Rs 20 lakh to Rs 1 crore and for IPO financing from Rs 10 lakh to Rs 25 lakh per person. With capital markets witnessing significant participation from retail investors, and an equity cult gaining traction for sustainable wealth creation for younger generations, the move promises to unlock value for both FIs as also participating holders of equities.
Introduction of risk-based deposit insurance premium against the currently applicable flat rate of premium, ensures, re-vised premium for banks could save around Rs 1,300/1,500 crore per annum ensuring banks which are “sound” paying a lower premium, doing away with the flat rate premium being charged at present.
The expected credit loss (ECL) framework of provisioning with prudential floors proposed should anchor banks’ quest to adapt best underwriting practices, in sync with evolving economic conditions as also siding with better monitoring and supervision mechanisms that together should also result in better pricing for credit to different borrower classes eventually.
Postulating the Basel III endgame in full through making the revised Basel III capital adequacy norms effective for banks from April 2027 aims to address primarily excessive variability of risk-weighted assets across banks, improving confidence in capital ratios calculated/stipulated framework as desired by the BIS, Ghosh said.
In lockstep, draft guidelines on standardised approach for credit risk proposing lower risk weights on certain segments viz. MSMEs and residential real estate (including home loans) are expected to reduce the overall capital requirements, benefitting banks as also sectors by higher credit allocation, he said.
Revision of external commercial borrowing framework which provides for expansion of eligible borrower and recognized lender base, rationalization of borrowing limits, rationalization of restrictions on average maturity period, removal of restrictions on the cost of borrowing for ECBs, review of end-use restrictions and simplification of reporting requirements, will further liberalise the ease of access to ECBs for corporates, and help banks grow their forex business.