A rethink of banks' exposure to 'sensitive sectors' may be needed to ease the path of a proposed move to allow them to finance mergers and acquisitions (M&As) in the country.
The Reserve Bank of India defines capital markets, real estate, and commodities as 'sensitive sectors' in view of the risks associated with the fluctuations in asset prices.
The ceiling for banks' exposure to sensitive sectors in a financial year is five per cent of the total deposits at the end of the previous financial year.
According to the RBI's Report on Trend and Progress of Banking in India 2023-24, banks' exposure to sensitive sectors stood at Rs 46.62 trillion in FY24, accounting for 27.2 per cent of their loans and advances. It is a 34.1 per cent increase over FY23.The figures for the sub-segment of capital markets were Rs 2.43 trillion, or 1.4 per cent of banks' loans and advances in FY24. This is higher by 31.3 per cent over FY23.
Senior bankers said given the substantial exposures banks will have to take for M&A financing, the current ceiling for banks' exposure to sensitive sectors will be a hurdle. Even if the sub-segment for capital markets within the sensitive sectors were to be given more space, it will likely be inadequate.
These issues are expected to be taken up with the banking regulator through the Indian Banks' Association.
The RBI's draft for comments on commercial banks' capital market exposure (CME) released did not refer to sensitive sector exposures. But it said the aggregate CME of a bank, on a solo basis, should not exceed 40 per cent of its Tier-1 capital at the end of the previous financial year.
-- Raghu Mohan and Abhijit Lele, Business Standard
