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Informist, Friday, Nov. 7, 2025

 

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--RBI Malhotra: Recent steps try to balance growth aim with stability 
--CONTEXT: RBI Governor Sanjay Malhotra's comments at event in Mumbai 
--RBI Malhotra: Proposed ECL norms to help with appropriate loss buffers 
--RBI Malhotra: Allowing banks to finance M&As to benefit real economy 
--RBI Malhotra: M&A financing by banks to help with better fund allocation 
--RBI Malhotra: FX reserves healthy, capital flows robust 
--RBI Malhotra: Capital flows will remain strong rest of the year 
--RBI Malhotra: External borrow to stay banned for speculative land trading
 

 

MUMBAI/NEW DELHI – At a time when the Reserve Bank of India is planning to relax norms of external commercial borrowing for Indian companies, Governor Sanjay Malhotra said this route will, however, "remain prohibited for speculative dealing or loans for land or property trading". Speaking at the 12th Banking and Economics Conclave 2025 organised by State Bank of India, Malhotra said that external commercial borrowing will be permitted only for foreign direct investment-compliant real estate projects.

 

He said calibration of the ECB framework is a natural step in India's financial evolution, that reflects strong fundamentals guided by prudence and inspired by confidence in the economy's capacity to engage with global finance on its own terms. "The removal of all-in-cost ceilings will encourage competitive rates and promote prudent hedging behaviour. Expansion of the universe of eligible lenders will improve pricing efficiency. Linking the borrowing limits to the borrower's net worth under the automatic route links ECB to the strength of the borrower while enhancing ease of doing business," Malhotra said.

 

He also said the overall soft ceiling of total outstanding being 6.5% of the GDP will mitigate any risks of excessive external leverage. 

 

In October, the RBI had released the draft regulations for amendment in the external commercial borrowing framework under Foreign Exchange Management Regulations. The proposed noms explicitly prohibited borrowed funds to be used for speculative or high-risk businesses like chit funds, Nidhi companies, real estate trading, or agricultural activities that aren't open to foreign investment. Similarly, borrowers cannot channel these funds into buying securities or engaging in risky trades except under specific, regulated circumstances like mergers, acquisitions, or overseas investments already permitted under existing rules. Even on-lending--passing on borrowed funds to other entities--is restricted to tightly controlled scenarios, such as lending within a regulated group structure or through entities already monitored by the RBI.

 

Malhotra said India's tweaks to external commercial borrowing framework come against the backdrop of a strong external sector. "India's current account recorded a surplus of $13.5 billion in the last quarter of the last financial year. This is 1.3% of our GDP. Even the first quarter of this year (Apr-Jun), we had a modest deficit of only about $2.4 billion or 0.2% of our GDP. The foreign exchange reserves are very healthy. Even on the capital account, the flows are very robust. Net inflows to India under the foreign investment, ECB and NRI deposits were higher in the first quarter by almost $4 billion. Our projections show that the capital flows will remain quite strong even during the rest of the year," he said.

 

On another widely anticipated regulatory step of allowing banks to finance mergers and acquisitions by Indian companies, Malhotra said the "removal of the restriction on the banks will benefit the real economy". A draft circular by the RBI has proposed capping the aggregate capital market exposure of a bank at 40% of its tier 1 capital as recorded on Mar. 31 of the previous financial year. Moreover, the aggregate exposure of a bank towards acquisition financing should not exceed 10% of its tier 1 capital.

 

A bank may finance at most 70% of the acquisition value, with at least 30% of the acquisition value to be funded by the acquiring company in the form of equity using own funds, the RBI proposed. Malhotra said these guardrails will ensure safety while allowing banks and their stakeholders to reap benefits of additional business.  

 

Lauding banks for their improved financial performance and capital buffers over the last few years, Malhotra said these are far more matured today than they were a decade ago. "The project finance directions issued recently address risks arising from regulatory approvals and availability of land, etc. The proposed forward-looking expected credit loss provisioning will force earlier recognition of the deterioration in asset quality and provide for appropriate loss buffers," he said.

 

Malhotra said the recent regulatory proposals strive to attain a balance between the drive to innovate and grow on the one hand and the duty to ensure stability on the other.  End

 

Reported by Sagar Sen, Shubham Rana and Anshul Choudhary

Edited by Tanima Banerjee

 

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