Indian banks want the Reserve Bank of India (RBI) to allow them to directly participate in financing mergers and acquisitions (M&A), a lucrative business activity which saw nearly 700 deals worth $24 billion in the first half of 2025.

A lobby line has started with the State Bank of India (SBI) formally requesting the RBI to permit Indian banks to fund acquisitions. The Indian Banks’ Association (IBA), an industry body, is also in favour of the restrictions being lifted. 

“SBI has been formally requesting the regulator. We will make a formal request from the IBA also,” SBI chairman CS Setty, who is also the chairman of IBA, recently said at a panel discussion at FIBAC 2025.

Setty wants the relaxation to at least start with some listed companies where deals are more transparent and approved by shareholders. He believes banks should be allowed to step up for this kind of financing, which is essential for India’s growth ambition.

Several senior bankers also feel that such a significant chunk of growing business should not be denied to Indian banks due to regulatory chains which bar them from providing loans to domestic companies for buying equity in other firms. It also restricts them from holding shares in companies beyond a certain threshold.

For financing M&A deals, Indian companies thus have to depend on non-banking financial companies (NBFCs), foreign banks, private equity or bond issues. Sometimes, it turns out to be a costlier source of raising funds.

“The ecosystem has changed and Indian banks are much healthier now, with non-performing loans no more weighing them down. If the restrictions are lifted, companies can have access to cheaper funds to support their acquisitions. This will give a boost to strategic M&A deals,” said the head of a leading bank who did not want his name to be mentioned.

Why RBI didn’t allow Indian banks to fund M&A deals

In most major markets, banks provide ‘acquisition loans’ so that deals become easier to fund. The RBI, however, decided to bar Indian banks from financing acquisitions due to fears of big corporate groups taking over smaller companies and of speculative exposure to overvalued deals. The regulator also felt the need to shield depositors’ money from risky takeover financing as acquisitions can go wrong due to integration challenges and fluctuating valuations. 

Post-liberalisation when the government opened up the economy in 1991, there was a need that new entrepreneurs spring up and grow. In an accelerating economy, domestic banks had enough in their plate as they had to finance projects, working capital and capital expenditure of companies besides providing retail loans to consumers. 

For the past several years, banks themselves had to undergo a cleaning up process as their loan books suffered large corporate defaults, particularly in the infrastructure and steel sectors. The gross non-performing asset (NPA) ratio for the banking sector peaked at 11.5% in March 2018 while for public sector banks it was even higher at 14.58%. But since then, the bad loan ratio has declined considerably to 2.3% overall and 2.58% for state-run banks as of 31 March 2025. 

Why banks feel time right now for rules to change

Senior bankers feel that the time is now right for the regulator to change the rules as the Indian economy, corporates and banks have matured. This would deepen the M&A market while providing Indian banks the opportunity to target this segment, they said.   

There were other developments that improved the ecosystem. The Insolvency and Bankruptcy Code (IBC) in 2016 provided lenders a better mechanism to recover bad loans and inculcated a credit discipline in companies as promoters were scared of losing their firms in case of defaults. Banks also upgraded their risk management systems while companies improved their governance norms.  

With waves of consolidations sweeping across various sectors of the economy, domestic banks feel they shouldn’t be left out of the large M&A market while foreign banks and NBFCs were given the opportunity. They want a level playing field, particularly after having brought about many internal changes and reducing their bad loans. They are confident that they are better prepared now to handle acquisition financing even as companies have been moving towards bigger M&A deals.

Banks are placing their requests to the RBI at a time when credit growth has slowed down and corporates have moved to other sources of fund raising, senior executives said. The larger corporates have also been deleveraging as they now hold significant cash balances.  

Bankers admit that the capex plans of corporates may not fully crystalize into corporate credit as they either have access to capital markets or robust internal funds. The traditional bank loans have also been impacted by increased activity in the corporate bond market. Under these circumstances, bankers say a diversification of the loan book into structured corporate finance would help. 

The share of corporate loans in total bank credit has consistently declined over the last 14 years, according to a study by a consulting firm. The segment share slipped by 22% to stand at 36% in FY25, from 58% in FY11.

“The bank lending mix has changed dramatically over 15 years. Corporate credit is moving away from banks as alternate funding provides more end-use flexibility,” BCG said in a report released at FIBAC 2025.

Banks, however, will have to play a bigger lending role as India has the ambition of scaling its GDP to $7.3 trillion by 2030 from its current size of over $4 trillion. The M&A activity, a core driver of corporate growth, is expected to intensify during this period and banks do not want to be left out of it. 

What is way forward

Ruchin Goyal, managing director and senior partner at BCG, has suggested that banks be allowed to fund acquisitions with the right safeguards. “The restrictions (RBI) in the past were because they had been misused. But now with so many enabling environments coming in, with NPAs at all-time low, the regulator can start relaxing these norms. It's for the regulators to put the right guard rails," he said, adding that one could start with the "safest" segments such as large listed companies and land financing.

The other safeguards could include capping bank exposures; linking loans to cash-flow generating assets; and securing strong collaterals. The intention would be to make domestic banks provide the resources to companies for their inorganic growth and scale-up. 

There are risks, however, on allowing M&A financing and over-leveraged buyouts can be damaging. If debt is made available easily, it could also lead to an overheated acquisitions market and trigger hostile takeovers. The regulator has to weigh in all these factors before deciding on whether the rules need to change for cautious entry of domestic banks to fund acquisitions or to continue with the restrictions.