The heads of two leading public sector banks have said that funding corporate takeovers in India is a huge opportunity and they will need to collaborate with other peer banks to work on this as the Reserve Bank of India (RBI) opens up this line of lending.

Punjab National Bank managing director and CEO Ashok Chandra said the funding scope for big banks would have been around Rs 1.20 lakh crore during the last financial year. 

“Mergers and acquisitions (M&As) worth Rs 10 lakh crore of funding value took place last year. If you take 40% of that as the debt component, it works out to Rs 4 lakh crore. Even if I take a conservative estimate of 30% of that to be funded by big banks like ours, that amount comes to Rs 1.20 lakh crore,” Chandra said.

The way forward is for banks to frame a strategy for M&A funding. “What we will do now is to discuss with some of the other big banks and put in place a proper policy as we were not allowed earlier by the RBI to do M&A funding. This is a very good scope for all the leading public sector banks in the country. In this lending space, PNB will definitely play a big role,” Chandra said.

State Bank of India, the country’s largest lender, is open to collaborating with foreign banks on acquisition finance for companies in India. "Some of the foreign banks are very well into this activity (M&A financing). We don't mind collaborating with them," SBI chairman CS Setty told reporters.

SBI has experience in doing outbound acquisition finance and has gained considerable expertise in this aspect.

SBI can also use its in-house investment banking unit SBI Capital Markets' expertise for such deals, Setty said.

SBI knows domestic corporates very well, which, coupled with the ability to fund outbound finance, places it very well, the chairman added.

The bank’s existing corporate finance vertical will handle the M&A funding activity. “We are unlikely to form a new vertical for it,” Setty said.

The RBI has proposed to allow banks to fund acquisitions by companies in India but has imposed certain conditions, including restricting it to listed firms with a three-year profit track record and capping the financing up to 70% of the acquisition value. As per the guidelines, a bank’s total exposure towards acquisition finance must not exceed 10% of its tier 1 capital. 

SBI has some concerns about the 10% cap clause and will write to the RBI on this through the Indian Banks’ Association, Setty said.