Reserve Bank of India Governor Sanjay Malhotra on Friday said the central bank’s proposal to allow banks to finance acquisitions will boost the real economy and will come with guardrails to ensure safety of the banking system.“It (acquisition finance) is acknowledged as an integral element of an evolved financial system that helps in better allocation of financial resources,” Malhotra said. Recognising its need, non-bank players such as NBFCs and bond markets are already allowed to provide such funding, he said at the SBI Banking and Economic Conclave. The RBI had announced easing of acquisition financing and several other measures to boost credit flow and economy last month.“Removal of the restriction on banks will benefit the real economy,” he said. The proposed guardrails like limiting bank funding to 70 per cent of deal value, limits on debt-to-equity ratio, aggregate exposure limits relative to Tier-1 capital, and eligibility criteria will contain concentration and credit risks, thereby ensuring safety while allowing banks and their stakeholders to reap benefits of additional business, the RBI Governor said.Malhotra said the proposals to enhance the limits for lending to individuals against securities and rationalise the norms for lending to capital market intermediaries are part of the normal process of review, seeking to reset the limits, set way back in 1999. “Importantly, the revision in limits has been accompanied by a more structured Loan to Value (LTV) framework, sensitive to the risks of the underlying securities,” he said.He said the proposed removal of limits on loans against debt instruments, while retaining the regulatory limits for equity instruments, recognises the fundamental difference between the two instruments from a risk perspective. “The key risk a debt instrument carries is credit risk, and just like loans, credit risk is expected to be managed as part of the broader credit risk management framework,” Malhotra said.An additional comforting factor is that only listed and investment grade debt securities are proposed to be permitted as collateral. This rationalisation is also expected to foster a virtuous positive feedback loop for the development of the bond market, Malhotra said.On the withdrawal of the Specified Borrower Framework, RBI Governor said the large exposure framework, which is aligned with international best practices, is now well-established and the supervisory tool kit is vastly improved. This framework was instituted almost a decade ago, in a very different financial environment.Story continues below this ad“This is a unique measure, which perhaps no other country that has implemented the Large Exposure framework (LEF), at the bank level, has. At that time, the banking system was grappling with elevated levels of stress, which is no longer the case,” he said.He said the recent past has also seen structural transformation of financial intermediation into a sophisticated and layered system. Nimble FinTechs and NBFCs now assume a greater role in sourcing and origination. ‘Development of capital markets and credit risk transfer channels such as securitisation now provide a conduit for risk transfers. The Project Finance Directions issued recently, address risks arising from regulatory approvals and availability of land,” Malhotra said.The proposed forward-looking ECL provisioning will help early recognition of deterioration in asset quality, he said.All these measures are balanced and appropriate, built on the bedrock of a banking system that has been systematically fortified over the last decade, with financial stability remaining the unwavering cornerstone of our policy architecture. “All the changes are incremental in nature,” he said.Story continues below this adMoreover, no regulatory measure can be understood in isolation, he said. Each measure has to be seen in the continuum of regulatory evolution and not in isolation. “These proposals must be read against the broader regulatory scaffolding, which mitigates the risks. Together, the regulations create a multi-layered defence, to keep systemic risk in check,” he added.