RBI Proposes Tighter Norms for Bank Lending to Capital Markets and Acquisitions
UPSC Relevance
Prelims: Indian Economy (Banking Sector, RBI functions and regulations, Capital Markets, Tier-1 Capital, Non-Banking Financial Companies - NBFCs, Risk Weights, Mergers & Acquisitions).
Mains:
General Studies Paper 3 (Economy): "Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment"; "Inclusive growth and issues arising from it"; "Banking sector reforms"; "Role of RBI".
Key Highlights from the News
RBI has proposed new caps for banks lending to capital markets and corporate acquisitions.
Proposed limits:
Banks' direct capital market exposure will be limited to 20% of their Tier-1 capital.
Aggregate exposure (direct and indirect) will be limited to 40%.
Acquisition finance will be limited to 10%.
This move aims to prevent the use of bank funds for excessive speculation in the stock market and to ensure the financial stability of the banking system.
For acquisition finance, banks can only fund a maximum of 70% of the transaction value. The remaining 30% must be sourced by the acquiring company itself.
RBI also proposed revising risk-weight guidelines for infrastructure loans provided by NBFCs.
These new stricter directives come shortly after a recent relaxation of regulations, which allowed banks to fund acquisitions and raised IPO lending limits.
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