RBI to unleash Indian banks to finance M&A next month

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A big change is coming for the Indian banking system. Starting 1 April, India’s central bank will allow domestic banks to fund mergers and acquisitions. It’s a change to long-held rules barring lenders from the Indian M&A market, which has so far been dominated by foreign lenders and private credit funds.

As Indian banks prepare to lend more to domestic corporates, what does this mean for liquidity, access to funding, and for international lenders that have earned 20% yields so far?

9fin's Mumbai-based reporter Rajhkumar Shaaw and Asia editor Richard Macauley answer these questions and walk listeners through the changes in this latest edition of our Cloud 9fin podcast.

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Richard Macauley:

Hello and welcome to another Asia edition of Cloud 9fin. I'm 9fin's Asia editor, Richard Macauley. I'm in Hong Kong and I'm joined by our reporter Rajhkumar Shaaw based in Mumbai.

One thing familiar to anyone who follows India's financial, economic or business development would be the nation's labyrinth of rules and regulations. Many would argue that India's growth rates are hampered by the multi-layered nature of red tape. That is, rules coming from and differing between individual states, others left over from a bygone era, and that's all before you get to national rules and regulations.

Of course, Prime Minister Narendra Modi has been trying to cut some of that red tape, and both his government and the central bank has so far made good progress. Now, a big change coming up on April 1st is to allow India's banks to finance M&A, something they were restricted from doing in the past.

Raj has written a detailed explainer for 9fin on what this change could mean for foreign lenders operating in India, as well as for private credit funds.

Richard Macauley:

And Raj joins us here to offer a little more insight, too, on those upcoming changes. Welcome, Raj. Could you begin by filling us in on exactly what India's central bank, the RBI, has changed and how big a deal is this?

Rajhkumar Shaaw:

Yeah, thanks, Rich. Happy to be here. So, the Reserve Bank of India has said that from the first of April, domestic banks can finance mergers and acquisitions. So, previously, the Indian banks were effectively barred from providing acquisition financing.

This has been one of the long-standing demands of the banking system to let Indian commercial banks tap into the lucrative and growing sector of deal financing. And as the Indian economy is growing, so are mergers and acquisitions. M&A volumes in India hit $113 billion in 2025, which is up 42% from the year before. So, the timing of this rule change is not accidental. It's a win-win for both banks and corporates. Banks get new avenues to lend and companies get access to cheaper funds.

Richard Macauley:

And as you said, the restrictions have been in place for a long time, decades, actually. So, what was the rationale behind the original restriction?

Rajhkumar Shaaw:

Right. So, the restrictions stemmed largely from the central bank's concern around financial stability and asset quality. Indian banks primarily lend using public deposits. Hence, the regulators were cautious about exposing these funds to transactions that involve leverage and are risky. So, the RBI, Reserve Bank of India, wanted to avoid a situation where a bank funds highly leveraged acquisition that might later turn out to be bad. So, acquisition financing was largely kept outside the traditional banking system.

Richard Macauley:

Raj, you mentioned that the original restrictions were in place because the RBI wasn't so keen on local banks getting into leveraged finance. But what changed the central bank's mind?

Rajhkumar Shaaw:

So, there were a couple of things. Number one, there was a growing demand from the banking sector that they should be allowed to be treated on par with foreign banks. And secondly, the M&A sector was getting very active. So, there was a natural demand for such financing. There was, so it was both a demand and a supply situation. And there was a gap which was needed to be filled. Hence, the RBI moved in the right direction.

Richard Macauley:

Okay, so in pursuit of this regulatory relaxation, the RBI floated draft rules in October. Last month, those rules were finalized. Can you discuss some of the most significant changes made in that process?

Rajhkumar Shaaw:

Sure. In October 2025, when the draft rules were circulated, the bankers said, while this is good and that they are allowing M&A financing, but the rules were such they would hardly move the needle. The bankers said it was a case of the glass half full and the glass half empty. However, based on the feedback, the RBI updated the rules and the final framework was published on the 13th of February. And this was a big, significant upgrade.

There were three major complaints that the bankers had that had been now taken care of. Number one, the October draft had restricted financing to only listed companies in India. But now, the final guidelines allows banks to finance acquisitions of both listed and unlisted companies, provided certain conditions are met, of course.

Next, the RBI has doubled the exposure cap. Banks can now deploy up to 20% of their tier one capital base, which is double of the 10% proposed earlier. And thirdly, the loan to value ceiling has been increased from 70% earlier to 75% now, which means banks can now finance the larger portion of a deal. Of course, the acquirer has to bring in 25% of the acquisition value compared with 30% earlier. So these were the three major changes which were taken care of in the final draft.

Richard Macauley:

Okay, so three improvements in the six-month consultation process. How much of a surprise was that, that the final rules were actually more generous than the earlier proposals?

Rajhkumar Shaaw:

There was no surprise as such because there was a lot of lobbying going on from the banking community. They wanted these rules to be changed. And the RBI understood that without making these changes, the framework is going to be a non-starter.

And to be clear, the RBI had, when it had sent out the draft proposals in October 2025, they had mentioned that this is a consultation process. We want feedback. And based on that, rightly so, they have published the final guidelines, which I think is a fair move.

Richard Macauley:

All right, good stuff. So with Indian commercial banks being shut out of M&A lending for so long, how have Indian corporates been financing those acquisitions until now? And how likely is that landscape to change?

Rajhkumar Shaaw:

So until now, the Indian companies who wanted to finance the acquisition, they had to go to the foreign banks, non-bank finance companies, mutual funds, or private credit funds.

Foreign banks, and out of these two, particularly foreign banks and private credit in particular, has become a major player in the Indian acquisition financing market over the past decade. These lenders have stepped in where banks could not. So to give an example, if an Indian corporate wanted to acquire a company, they would get the firepower mostly from foreign banks and private credit firms.

But once the acquisition was completed, the debt would get refinanced by domestic commercial banks. This way, in this process, the banks were losing out on the lucrative deal financing margins. Now that gap is closed by the RBI. Now with banks entering into this space, large corporates can gain access to cheaper financing, which may reduce their reliance on alternative credit providers.

Richard Macauley:

Okay. And what have we heard from India's domestic banks as they react to the rule changes from the RBI?

Rajhkumar Shaaw:

Yes, they are all very happy. Almost all banks have welcomed the move. And the largest bank in India, which is the State Bank of India, is already in talks with Japanese banks to collaborate on M&A financing under the new RBI framework.

So as per the RBI Governor, under the new norms, the State Bank of India can deploy up to $10 billion US for acquisition financing. But however, that said, the banks are expected to remain selective and they will focus primarily on stronger borrowers and well-structured transactions.

Richard Macauley:

Okay. And I'm assuming obviously the RBI hasn't gone full-on, let's say, fair. What checks and balances has the central bank kept in place to manage risks going forward?

Rajhkumar Shaaw:

So I think the first check and balance is that the banks can only finance up to 75% of an acquisition value, meaning the company, the acquirer, has to contribute 25% from its own funds. And there are also some slightly, there are some eligibility requirements also.

For example, the acquirer must have a minimum net worth of 5 billion rupees or $55 million US. It should also have a three-year tax record of profitability and should also have an investment-grade credit rating.

In addition to all these points, the banks can only finance deals where the acquisition results in the buyer getting control of the target. Which effectively means that it rules out minority stake purchases and also related party transactions are barred, as is financing for deals involving entities where there's a common promoter group.

So I think these are the checks and balances. It has been a very cautious step. But nevertheless, I think bankers are happy that finally the demands have been made and the sector will be opened up for financing.

Richard Macauley:

Okay. And finally, private credit funds have built highly profitable franchises in India, scooping up the chance to lend to corporates there at yields of 18%, 20%, even higher than that. New competition is entering now from local banks. Tell us how much of that business is genuinely at risk of change.

Rajhkumar Shaaw:

So banks will certainly compete for the highest quality borrowers, especially the large corporates of India that can meet the RBI's eligibility criteria. But private credit funds are unlikely to disappear from the market because these funds often specialize in bespoke, structured and high-risk transactions that the banks typically avoid.

So recently, we met a Mumbai-based manager of a large foreign fund who said Indian banks will begin to eat away a little bit of lunch from the foreign banks, a little bit of lunch away from the non-bank finance companies, and a little bit of lunch away from the private credit funds. But they are unlikely to take away the entire plate from any one of them.

So I think that, in my view, sums up the whole thing. It's a little bit of from everywhere, but not taking away anybody's complete market share.

Richard Macauley:

Amazing. Rajhkumar Shaaw, thank you.