Compass is set, but, for banks, M&A seas are rough

MUMBAI: Acquisition funding will require Indian lenders to build new methods of credit assessment, which would involve tackling higher-order complexities and uncertainties than the typical corporate lending to operating companies, analysts said.

Larger banks with established capital markets divisions, such as ICICI Securities and SBI Capital Markets, will be better placed than mid-sized lenders. For financing deals, banks will need to develop a more nuanced assessment than steady-state projections of financial statements.

"Merger and acquisition (M&A) deals require assessment of synergies and value creation thereof. Add to that the uncertainty associated with the success level of the integration itself," said Deep Mukherjee, director, risk management, Boston Consulting Group (BCG). "This requires much more nuance than steady-state projections of financial statements for the following five years and all these complex assessments have to be done in a shorter period of time."

Banks have been requesting the Reserve Bank of India ( RBI) to allow them to finance acquisition by local companies as it will give them another line of business amidst challenges in corporate financing as companies shy away from taking debt.

The latest such request came from SBI chairman CS Setty, when in a public forum he said that acquisition financing should be allowed.

"We have been formally requesting the regulator, we'll make a formal request from the IBA (Indian Banks' Association) also, that at least start with some listed companies where the acquisitions are more transparent and are approved by the shareholders," Setty said in August, echoing private sector bankers like Uday Kotak who have expressed such intentions previously.

Depositor Funds
Historically, the RBI has not allowed Indian banks to finance acquisitions because such financing is considered risky, especially for lenders dealing in public deposits.

Also, acquisition financing is based on an acquiring company's growth ambitions, which could go wrong as banks may overvalue assets to support their large corporate clients.

Analysts said banks with integrated data & analytical capabilities in their existing large corporate lending business will find it easier to build the enhanced assessments required for M&A lending.

Kuntal Sur, partner, financial services and treasury, PWC, said large banks will have an advantage because they already have an established capital markets division / securities division with whom they can collaborate.

"They can leverage that network and have knowledge sharing and internal group transfers on M&A financing. Other Banks will have to develop structures and capabilities to fund corporate acquisitions," Sur said.

To be sure, the RBI is yet to release final guidelines on acquisition financing and it is still just an announcement from the central bank. "To expand the scope of capital market lending by banks, it is proposed to provide an enabling framework for Indian banks to finance acquisitions by Indian corporates," the RBI said on Wednesday.

Bankers and analysts said that the fine print on the final guidelines will be keenly studied to assess the scope and remit of this new kind of financing.

Currently, Indian banks are barred from lending for mergers and acquisitions, pushing companies to rely on non-banking financial firms or bonds to finance such deals.

Large and deep-pocketed foreign banks have dominated this space for years with access to cheap funds. Indian banks will also have to contend with well established overseas competitors, analysts said.