M&A financing the new frontier for banks, but RBI's watching

Core Viewpoint - The Reserve Bank of India's cautious proposals on M&A funding for banks aim to balance risk management with the growing opportunities in the M&A space, which is expected to exceed $100 billion annually in India [4][5][16]. Group 1: M&A Market Dynamics - Domestic banks are now entering the M&A advisory space, traditionally dominated by foreign banks and shadow banks, indicating a shift in the competitive landscape [4][5]. - The aggregate acquisition finance exposure for banks is capped at 10% of their Tier-I capital, and financing can only cover up to 70% of the acquisition value [5][6][14]. - The net worth of the banking sector was over ₹27 trillion, allowing for available funds exceeding $30 billion for M&A financing under the proposed regulations [16]. Group 2: Regulatory Framework - The draft regulations propose a fixed debt-to-equity (D/E) ratio of 3:1, which some industry experts argue may not adequately reflect sector-specific nuances [8][13]. - There is a call for more flexibility in underwriting judgments based on individual deal characteristics rather than strict regulatory limits [9][12]. - The proposed regulations signal a cautious approach from the RBI, reflecting concerns about market risks and the need for robust governance in M&A transactions [12][22]. Group 3: Industry Perspectives - Industry leaders express a desire for more liberal financing norms to facilitate M&A activities, while also acknowledging the need for improved governance and oversight within banks [22][23]. - The potential for partnerships between state-run banks and established financial institutions is highlighted as a way to enhance M&A capabilities [19][21]. - Compensation structures for M&A professionals are expected to be significant, reflecting the specialized nature of the business and the competitive landscape for talent [18][20].