SBI eyes deal finance on home turf, as RBI draft rule moots level field for Indian banks

Having financed India Inc.’s overseas buyouts for long, State Bank of India (SBI) sees itself ready to underwrite mergers and acquisitions (M&As) at home, as the Reserve Bank of India (RBI) considers opening that door for domestic lenders.

“We have been doing outbound M&A financing with Indian corporates acquiring overseas entities. Banks like SBI are well-versed with acquisition financing,” C.S. Setty, chairman of the country’s largest lender, told reporters on the sidelines of the Global Fintech Fest in Mumbai on Wednesday.

On Tuesday, Axis Bank’s managing director and chief executive officer Amitabh Chaudhry said his bank intends to not just participate but to give the foreign banks, who have been financing these acquisitions for the several years, “a run for their money.”

Detailing its monetary policy review on 1 October, the RBI announced a draft framework to permit domestic banks to underwrite acquisition financing for Indian corporates, a long-standing demand of the banking sector. Until now, regulatory constraints effectively barred Indian banks from lending for the purchase of shares in acquisition deals. Those tasks were left largely to foreign banks, non-bank financial institutions, bond markets and private equity.

With the RBI looking to rework the rules, domestic banks may soon enjoy a level playing field, subject to safeguards, credit limits and oversight norms. Market participants believe this move could unlock value in corporate funding life cycle.

“M&A deals in FY24 (fiscal year 2024) were valued at over $120 bn (around ₹10 lakh crore, or trillion). Assuming debt component of 40% of M&A and 30% of this could be financed by banks, this translates into a potential credit growth of ₹1.2 lakh crore,” a note by SBI Research Ecowrap said after the RBI’s announcement on the draft rules.

Exploring small-ticket loans

SBI is exploring new opportunities to expand small-ticket digital loans through the Unified Payments Interface (UPI) but believes it needs to have its collection recovery process for the same in place first, Setty said.

“We have predictive AI (artificial intelligence) models, which gives a pre-approved loan to a large base of customers. But this small value credit has to be looked from a fact that delivering this credit is easier on the UPI, but we need to strengthen our collection mechanism,” Setty said.

SBI’s domestic merchant onboarding on UPI increased by about 180,000 in the June quarter, taking its cumulative to 5.44 million as of June end.

He said the bank has to work on getting its collection recovery piece right before it rolls out further products on the UPI. “…it is a very powerful tool which is available and it is also a critical element of inclusive credit available to people. We will definitely work on that,” the chairman said, adding that the bank is evaluating multiple models for ‘credit on UPI.’

In particular, the state-owned lender is exploring options to make credit available on UPI for vendors, he said. Vendor financing is a system where small businesses or merchants receive credit based on their receivables from customers. “Today, we have credit card receivables being discounted for a vendor, so whether we can do the same thing for UPI receivables also is something we are evaluating,” Setty said.

Vendor financing allows businesses to access working capital by using their pending receivables as collateral. For instance, when a merchant receives payments via credit cards, banks often discount these receivables, meaning they advance funds to the merchant before the actual customer payment settles. SBI is looking to replicate this for UPI transactions, where merchants can get financing against UPI-based receivables, helping them manage liquidity better.

“One way is intuitive credit availability to the user of UPI at the point of sale. We are using extensive data available to us and correlating it with UPI data to give a pre-approved line of credit, such as small-value loans, which can be enhanced as we go forward,” he said.

So far, SBI has been extending this product to farmers through Kisan Credit Cards (KCCs), given the rising use of UPI in rural and semi-urban areas. “KCC is one of the important elements because there is extensive UPI usage there,” Setty added.

“Our subsidiary SBI Cards has recorded almost 34% active RuPay cards, and 18% of spends are coming from SBI Cards. But credit products on UPI are limited to certain categories of products,” Setty said. As UPI credit evolves, it could become a major driver for financial inclusion by bringing small borrowers, merchants and farmers into the formal credit ecosystem, he added.

For the quarter ended June, SBI’s gross loan book rose nearly 12% on-year to ₹42.54 trillion. Its corporate loan book grew 5.7% to ₹12 trillion.