How RBI’s nod puts banks at the centre of corporate deals

When I wrote this column “Outdated Risk, Renewed Opportunities: A Case for Acquisition Financing” on May 30th, I wasn’t sure whether the Reserve Bank of India (RBI) was paying attention. Soon after, our friend Raghu Mohan, a veteran journalist, also wrote a detailed piece on the same topic in Business Standard. It turns out the RBI was listening and has responded with a bold and forward-looking reform in its latest policy statement.

The RBI’s latest decision marks a decisive turning point in the evolution of corporate financing in India. By allowing banks to finance mergers and acquisitions (M&As) by domestic companies, the central bank has opened a space that had previously been off-limits for banks. This change updates outdated guidelines on capital market exposure and brings Indian banking practices closer in line with global standards. It not only answers to long-standing demands from the banking industry, capital markets, and corporates, but also positions banks to participate in one of the fastest growing areas of corporate activity.

Historically, Indian banks were barred from directly funding acquisitions due to concerns that such exposure could destabilise their balance sheets. However, as I argued in my earlier paper, acquisition financing should be viewed as lending based on the cash flows of the target company. So, this does not necessarily increase a bank’s risk in the capital markets.

In the absence of bank participation in this space, over the years, companies turned to bond markets, commercial paper, external borrowings, and internal accruals to fund their acquisitions. Private credit funds, non-banking finance companies (NBFCs), and foreign lenders stepped into the vacuum and captured a market that was rapidly growing. This reform gives Indian banks an opportunity to re-enter a high-potential space precisely at a time when corporate consolidation is reshaping India’s corporate landscape. In the financial year 2024 alone, M&A deals in India exceeded USD 120 billion. If even half of those deals used debt financing, and banks provided a portion of that funding, the additional credit opportunity could amount to tens of billions of dollars.

The timing of this reform could not have been any better. India’s M&A market is witnessing strong momentum with sectors like pharmaceuticals, technology, financial services, and manufacturing undergoing significant consolidation. As companies pursue scale, access to new markets, and technological upgrades, the need for structured acquisition financing will only rise. Initially, banks may confine themselves to borrowers with strong balance sheets and low leverage, but with time, as they gain experience and build capacity, they will inevitably expand into larger and more complex deals. This reform will allow them to gradually reclaim market share from non bank lenders and foreign institutions that have dominated the Indian M&A space until now.

However, entering the M&A financing arena requires more than regulatory approval. Unlike traditional working capital or term lending, where collateral or asset cover often provides comfort, acquisition financing is inherently complex and demands specialised skills. It requires the ability to evaluate the future cash flows of target company, model post-acquisition synergies, and assess repayment capacity under various scenarios. To succeed, banks must develop their M&A advisory and underwriting expertise that combines credit risk analysis with investment banking style due diligence. Over time, this could deepen the talent pool within Indian banking and somewhat blur the line traditionally separating lending and deal-making functions.

In summary, the RBI’s policy change is more than a regulatory update, it is a game-changing opportunity. By unlocking M&A financing for Indian banks, it paves the way for them to actively support the next wave of business growth in India. With the right capabilities, banks can move from the sidelines to the centre of corporate transformation.

This shift by RBI isn’t just a policy tweak, it’s a strategic green light for banks to position themselves at the heart of India’s corporate future.