RBI Proposes Limits on Banks’ Market Exposure

• The Reserve Bank of India (RBI) has proposed a cap on banks’ total direct exposure to capital markets and acquisition financing.

• The cap is 20% of their tier-1 capital.

• The proposal follows the easement of restrictions on funding mergers and acquisitions.

• The RBI allows domestic banks to lend for acquisitions by Indian corporates, a segment previously dominated by foreign lenders and credit funds.

• Banks can finance a maximum of 70% of the deal value, with at least 30% funded by the acquiring company.

• Commercial banks can offer acquisition finance only to listed entities with a satisfactory net worth and profitability for the last three years.

• The loan should be fully secured by the shares of the target company.

RBI proposal for banks is important topic for Civil service exam (WBCS).

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