Syllabus: GS3/Economy
In News
- The Reserve Bank of India (RBI) rolled out a set of liquidity measures designed to make capital more accessible for investors and companies.
Key Measures by RBI
- Acquisition financing: For the first time, banks can now give loans to companies for buying other companies. This allows them to fund mergers, buyouts, and consolidation deals—something banks had been requesting for years.
- Enhanced Lending Limits: The RBI has dramatically increased individual loan limits against shares from ₹20 lakh to ₹1 crore, representing a fivefold increase.
- This substantial raise in the ceiling had not been revised since 1998 and reflects inflation-adjusted realities.
- IPO Financing Boost: The central bank raised IPO financing limits for retail investors from ₹10 lakh to ₹25 lakh per person, more than doubling the previous limit.
- This enhancement comes at a crucial time as India’s IPO market is experiencing several high-profile offerings in the pipeline.
- Debt Securities Lending: The RBI has completely removed the regulatory ceiling on lending against listed debt securities, giving banks unprecedented flexibility to extend credit backed by these instruments.
- This measure is expected to deepen market activity and enhance overall liquidity.
- Rolling back curbs on large borrowers: The central bank plans to withdraw the old framework that penalized banks for lending to very large corporations (with system-wide exposure above Rs 10,000 crore).
- RBI said the systemic risks will now be managed through macroprudential tools, while banks continue to face individual exposure caps under the Large Exposure Framework.
Need for the Measures
- Addressing Liquidity Pressures: Foreign Portfolio Investors (FPIs) have withdrawn $21 billion from Indian equities over the past year, pressuring the rupee and dampening market sentiment.
- Global Uncertainties: The measures come against the backdrop of trade tariff tensions with the US, curbs on H1-B visas, and geopolitical flashpoints in West Asia and Europe that have kept investors cautious.
- The RBI’s relaxations are specifically aimed at offsetting liquidity shortfalls and strengthening domestic participation in capital markets.
- Credit growth boost: Corporate lending has been the weakest part of overall bank credit growth.
- Allowing acquisition financing helps banks capture a bigger share of consolidation-led growth, especially in core sectors where fresh capacity creation is muted.
- Leveling the field with NBFCs: Historically, banks were capped at modest limits on loans against shares (Rs 20 lakh) and faced stricter loan-to-value rules.
- NBFCs, on the other hand, could set higher limits at their discretion.
- By raising the cap to Rs 1 crore and lifting ceilings on lending against debt securities, RBI has given banks a fairer playing field.
- Re-engaging with big corporates: Rolling back the 2016 restrictions signals RBI’s willingness to let banks lend more freely to large groups.
Expected Outcomes
- Enhanced Participation: Analysts believe these measures will significantly boost investor confidence, particularly among retail participants who often face funding constraints.
- High-net-worth individuals and institutional investors are expected to benefit from improved liquidity against their holdings.
- Market Deepening: The reforms are designed to widen retail and institutional participation in both primary and secondary markets, improve liquidity flows, and deepen financial intermediation.
- With ₹8 billion anticipated from IPOs in the final quarter of 2025, these measures are well-timed to support increased market activity.
- Economic Growth Support: The RBI emphasized that while expanding credit access, systemic risks will continue to be managed through macroprudential tools, ensuring financial stability while spurring market growth.
- These measures align with the broader Viksit Bharat 2047 agenda of credit deepening and financial inclusion.
Conclusion
- These reforms mark the RBI’s biggest capital market change in over 10 years, allowing Indian banks to take a bigger role in funding and supporting the capital market.
- Experts believe the changes will make foreign borrowing cheaper and easier for Indian companies, while still keeping strong safeguards to manage risks.
Source: IE
