Lifting of curbs on bank acquisition financing to aid economy, says RBI chief

Introduction

In November 2025, the RBI announced a significant liberalisation of its norms governing banks’ ability to finance acquisitions of companies. According to Governor Malhotra, allowing banks to fund acquisition activity—subject to prudential safeguards—“will benefit the real economy”. The move signals a structural shift in India’s credit‐intermediation regime, enabling banks to play a larger role in corporate mergers and acquisitions, rather than relying solely on non-bank or offshore financing channels.

Background and Policy Context

Historically, Indian banks were restricted from lending for the purpose of acquisitions—particularly leveraged buyouts or large corporate takeovers—because of concerns around asset-liability mismatches, concentration of risk, speculative uses of bank credit, and regulatory prudence. Meanwhile, non-bank financial companies (NBFCs), credit funds and offshore lenders filled much of that acquisition-financing space.

However, with India’s economy evolving, increasing corporate consolidation, larger M&A deals domestically and cross-border, and banks strengthening risk management and capital bases, the RBI deemed it appropriate to review the restrictions. The RBI’s “Developmental and Regulatory Policies” statement noted the gap in domestic acquisition financing and the need to deepen the credit market.

In October 2025, the RBI introduced a raft of measures to stimulate credit and bank lending—including raising limits for loans against listed debt securities and equity shares, simplifying external commercial borrowing norms, and freeing banks to fund acquisitions.

The Policy Change: What Was Announced

The key features of the announcement include:

• Banks are permitted to finance acquisitions by Indian corporates—something that was previously restricted.
• Guard-rails have been introduced: for example, bank funding will be limited to 70 per cent of the deal value.
• There will be limits on debt-to-equity ratios in such deals, exposure limits relative to Tier 1 capital of banks, and eligibility criteria (e.g., target companies must be listed, have adequate net worth and profitability) for banks to lend for acquisitions.
• The RBI emphasised that banks must still apply judgment on a case-by-case basis rather than having one size‐fits‐all prescriptions. Governor Malhotra emphasised that “no regulator can or should substitute boardroom judgement … each case, each loan, each transaction is different.”
• In parallel, the RBI has proposed draft norms to cap bank exposure to capital markets and acquisition financing: for instance, acquisition‐specific exposure would not exceed 10 % of a bank’s Tier 1 capital, and aggregate capital-market plus acquisition exposure would be capped at 20 % direct / 40 % including indirect channels.

Rationale: Why the RBI Took This Step

The RBI’s move is premised on several arguments:

1. Boosting the real economy: By enabling banks’ involvement in acquisition financing, corporates will have improved access to domestic credit for strategic expansion, consolidation, and growth. Governor Malhotra observed that the change “will benefit the real economy”.
2. Deepening financial intermediation: The reform closes a structural gap in the Indian credit market—whereby banks were excluded from a major segment of structured corporate finance. Enabling banks to participate strengthens the domestic financial ecosystem.
3. Alignment with global norms: Many advanced banking systems permit banks to lend for acquisitions under appropriate safeguards. Allowing Indian banks to do so helps bring domestic regulation closer to international practice while still maintaining prudence.
4. Efficient capital allocation: Acquisition financing—when done well—can lead to improved productivity, scale economics, sector consolidation, and better returns on capital, all of which support economic growth. The RBI indicated that acquisition finance is “an integral element of an evolved financial system that helps in better allocation of financial resources.”
5. Stimulating bank lending amid soft growth: With bank credit growth relatively muted and the economy-wide growth aspiration higher than actual, the policy loosening is part of a broader push to stimulate lending and investment.

Implications: What the Move Could Mean

For Banks

• Banks gain access to a new type of business: structuring, financing and servicing acquisition deals. This could diversify their revenue streams beyond traditional retail and corporate lending.
• Risk management becomes more complex: underwriting acquisitions involves event risk (deal closing/integration), bit higher risk of default if the acquisition under-performs, and possibly higher exposure to concentration risk.
• Need for strong governance: Since deals may involve related parties, complex covenants, share pledges, and large exposures, banks will need robust risk controls, due diligence, and monitoring.
• Competition: With banks entering this space, non-bank lenders and funds that previously dominated acquisition financing may face increased competition, possibly leading to margin compression or changes in deal structuring.

For Corporates

• Easier access to acquisition finance: Companies can tap bank credit domestically rather than rely solely on NBFCs, funds, or offshore borrowings. This may reduce cost of funding and speed up transaction execution.
• Potential for increased deal activity and consolidation: With acquisition financing constraints eased, we may see more M&A activity in sectors where scale matters (infrastructure, manufacturing, services, telecom).
• Need to meet eligibility criteria: Corporates will need to be able to satisfy bank-lending criteria (profitability, net worth, listing status or other eligibility thresholds) and ensure sponsor equity contribution (since bank financing capped at 70 %).

For the Economy

• Greater investment momentum: With more financing options, acquisitions can drive restructuring, efficiency gains, technology absorption, and sectoral consolidation—helping growth and productivity.
• Domestic credit growth boost: Banks may see incremental lending volumes, which may help revive credit growth and support economic expansion.
• Reduced dependence on offshore or alternative financing: Domestic banks financing acquisitions reduces reliance on external debt, thus improving resilience to external shocks.
• Balanced growth with safeguards: Since RBI has layered guard-rails and expects case-by-case assessment, the policy aims to promote growth without undermining financial stability.

Risks and Safeguards

While the policy is forward-looking, there are inherent risks. The RBI has flagged them and built in safeguards:

Risks

• Credit concentration risk: Many acquisitions might be driven by large corporates or related parties, increasing exposure risks.
• Event risk and integration risk: Acquisitions, especially cross-border or complex ones, carry risks of execution failure, regulatory delay, cultural integration, or other unforeseen liabilities.
• Leverage risk: If acquisition financing is overly leveraged, banks may end up with exposures to weak equity sponsors or under-performing targets.
• Contagion risk: If banks’ acquisition-related losses mount, it could impact their capital, depositors’ confidence, and financial stability.

Safeguards

• Maximum bank funding of 70 % of deal value.
• Restrictions on debt-to-equity, eligibility of target companies (e.g., listed, profitable, net worth).
• Exposure limits for banks relative to Tier 1 capital (e.g., acquisition finance exposure not to exceed 10 % of Tier 1 capital) and aggregate capital-market plus acquisition exposure caps (20 %/40 %).
• Continued supervisory tools: risk weights, provisioning norms, counter-cyclical buffers remain in play (as Governor Malhotra emphasised).
• Emphasis on case-by-case judgement rather than formulaic approval, thereby allowing banks to discriminate on quality of sponsors, target, deal structure.

Challenges Ahead

While the policy change is promising, its success will depend on execution. Some of the challenges include:

• Developing robust guidelines and ensuring banks have the capacity (skills, structuring, due diligence) to underwrite acquisition deals.
• Avoiding a rush of weak deals simply because the opportunity to lend has opened—governance will be key.
• Ensuring that acquisitions financed are genuinely productive and not simply leveraged arbitrage or financial engineering.
• Monitoring the ripple-effects: whether other risks (such as asset quality deterioration) creep in due to the new lending domain.
• Observing macroeconomic conditions: if growth slows, then leveraged acquisitions may become riskier.

Conclusion

The RBI’s decision to lift curbs on banks’ acquisition-financing capabilities marks a noteworthy turning point in India’s banking and corporate-finance landscape. By enabling banks to participate in acquisitions (with prudential guard-rails), the RBI seeks to deepen credit markets, accelerate corporate consolidation and growth, and strengthen the link between banking and real-economy expansion.

Governor Malhotra’s emphasis on “going wisely and slow” encapsulates the spirit of the reform—progressive liberalisation, tempered by sound risk management. If executed with discipline, this policy can open up new channels of financing, support strategic growth in the corporate sector, and contribute to India’s broader economic ambitions. At the same time, the embedded safeguards will be critical in ensuring that the expansion of bank credit into this domain does not compromise systemic stability.

As India pushes toward higher-growth horizons, this reform is an important piece of the puzzle—one that bridges structural credit gaps and aligns the banking system more closely with the growth trajectory of the economy.