Banking on reforms: RBI unlocks big lending for Viksit Bharat

The recent banking reforms moved by RBI in the last monetary policy have received encouraging response and RBI has kept in view the current strong fundamentals and financial strength of the banks and thought it fit to allow and provide opportunities for the banks to move into the next phase of new openings like allowing banks to finance towards mergers and acquisitions (M&As), which were hitherto not allowed for SCBs in India even though foreign banks were taking advantage of this space.

Similarly RBI thought that it is in the fitness of things now to relax the earlier rule of not more than Rs10,000 crore as the maximum exposure limit for a corporate, beyond which they have necessarily have to tap the capital markets for funds by way of corporate bonds.

India has grown in size and strength in terms of GDP growth and in view of the government both centre and states taking major focus on capex particularly on infrastructure, like roads, ports, airports, defence, railways, etc., and the project size has also been larger size and corporates are participating in these projects on public private partnership.

It is also evident that the government drive towards alternative clean energy projects like solar, wind, bio refinery, are also attracting large private capex. The recent drive towards private entry in defence sectors, similarly the government is pushing large scale investments in green technologies like renewables, green hydrogen, electric vehicles (EVs). There is also new investments are coming in a big way towards sunrise and high tech sectors like data centres, electronics and semi conductors.

There has been plans to establish new Industrial corridors of huge size to attract domestic and foreign investments. The PLI scheme initiatived by the Government is crucial in attracting fresh investments and positioning India as a manufacturing hub. Aviation and infrastructure are for major expansion plans. India has large potential for fast expansion and growth with favourable policies and both private and public as well domestic and foreign investments are key to achieve the coveted goals of developed economy by 2047.

The social and physical infrastructure, Digital Infrastructure and A1 will also enable these transformative growth and expansion. The Corporates will also strive growth in traditional core sector like power, steel, engineering and chemicals with a new focus along with upgrade and diversification.

In this background, as a policy and regulation support enabling greater role for the Banking sector to play a larger supportive role, RBI current policy and regulation support is highly appreciable and timely. RBI will now manage credit concentration risk at the individual bank level through the existing Large Exposure Framework (LEF) and any systematic risk will be addressed via macro prudential tools as and when necessary rather than penalisizing lending to large borrowers across the Board.

With banks and corporates are in a better financials and government finance has also been in good shape, it is necessary and required for next phase of enhanced growth stimulus. Allowing banks to finance mergers and acquisitions will allow corporates with cash surplus to scout for large acquisition both in India and abroad. Similarly the earlier cap in large scale lending by way of Maximum Exposure Framework being relaxed, banks and consortium of large size banks can come forward for financing viable such large size projects which corporates take up and this will act as enablers for earlier said new expansions.

In view of the large uncertainties in the international arena due to geo politics and unfavorable trade policy which is likely to affect international trade related growth for India and the government focus on Swadeshi and Atmanirbhar Bharat and need to maximize the domestic growth potential to a larger extent and also diversify our niche products, quality and efficient products with large scale technology upgrade and use of emerging technologies like A1, ML and spend higher share for innovation and, research and revelopment (R&D), which are absolutely essential for developed India, with enabling banks to extend full support for these initiatives in a greater manner, will facilitate the manufacturing transformation and Viksit Bharat.

At the same time, banks have to equally mindful of continuing to maintain and enhance their efficiency and financial ratios including enhanced capital support for taking such large projects financing. The Banks Risk Management Framework will have to be upgraded to care of All the risks like regulatory as well economic variation risks, sector specific risks along with traditional credit, market, operational risks are to be factored and monitored effectively within the Banks and probability of default has if any to be factored by prudential provisions requirements.

The climate risk and sustainability issues have also be taken into account in such infrastructure projects. The project implementation risks are much higher before completion and knowledge and expertise have to be developed within the organisation to measure and factor in these risks adequately. The endeavour toconverting the completed project related loans into marketable investment instruments must be strengthened with Invit. The credit enhancement initiatives recently taken up by NaBFID for project finance through a Partial Credit Enhancement facility will enable these Greenfield projects to get finance from Banks and capital markets.

The RBI has also proposed to enhance the ECB borrowing limit to $1 billion and total borrowing (external and domestic) upto 300 per cent of net worth as per the last audited balance sheet. This is also helping the corporates to access foreign borrowings by way of enhanced limit made available through this amended ECB regulations.

RBI has also stipulated that the cost of borrowing shall be in line with prevailing market conditions subject to the satisfaction of the designated AD category Bank. RBI has proposed further that the eligible borrower may raise ECB from a person resident outside India or a branch outside India or in the IFSC of an entity whose lending activity is regulated by the RBI. The end use restrictions and Minimum Average Maturity Requirements are proposed to be simplified. These are also policy support for Corporates to avail international finance.

RBI has also stated that it will be taking up review of capital market guidelines for banks with the proviso for. Provide an enabling framework for banks to finance acquisitions by Indian Corporates. Enhance the limit for lending by banks against shares, units of REITs, while removing the ceiling altogether on lending against listed debt securities and Put in place a more principle based framework for lending to capital market intermediaries. As stated that these are facilitative for more investment facilitation.

About 21 development and regulatory policy measures relating to Regulations, Foreign Exchange Management and Consumer Protection and Financial Markets in RBI 10th October policy initiatives are a great way forward and these measures are more of positive steps taken by RBI which will definitely get positive impact and prepare India for taking giant leap on the pathway towards Developed Economy, Viksit Bharat by 2047.

(The author is former Chairman & Managing Director of Indian Overseas Bank)