Since the inception of the Indian banking system, banks have been barred from financing mergers and acquisitions deals, with the primary prudential motive being the protection of public deposits from speculative corporate transactions. However, on October 1, 2025, the Reserve Bank of India, in its statement regarding developmental and regulatory policies, announced the liberalisation of India’s credit system for acquisition funding norms. This was followed by an official notice on February 13, 2026, that amended the Commercial Banks – Credit Facilities Directions, 2025, and the Commercial Banks – Concentration Risk Management Directions, 2025, to implement a framework that allowed acquisitions to be funded by Indian Commercial Banks. This change was made legally effective from April 1, 2026, removing the years-long restriction.
Why the need?
Till now, Indian companies have relied on private credit funders or offshore lenders to fund their acquisition costs; these arrangements were often quite costly and increased dependence on foreign funds. One motive of this liberal move was to reduce such dependence and strengthen India’s domestic financing ecosystem.
The most important was the transformation of India’s Banking system. During the 2010s, Indian banks were drowning in bad loans, which made the possibility of enabling acquisition financing, a high-risk stream of lending, impossible. The Gross Non- Performing Assets percentage fell from 11.2% to 2.1% from 2015 to 2025. This indicated improved balance sheet strength and greater capacity to underwrite higher-risk loans.
Another reason for the delay was the belief that acquisition financing was viewed differently from capital expenditure, as it resulted in a transfer of ownership of assets rather than the creation of new assets, due to which banks were unable to finance any company buyouts, which were a pathway for private equity and venture capital exits.
The New Rules:
Banks can now finance up to 75% of acquisition costs. The remaining 25% must come from the acquiring party’s own funds. The valuation for the investment must be independently conducted and aligned with RBI-prescribed rules.
The new rules allow banks to finance only non-financial companies, their non-financial subsidiaries, or a special purpose vehicle set up for the purpose of the acquisition. Only those deals can be financed where the acquirer wants to purchase equity shares or compulsory convertible debentures of the target company or its holding company.
Both listed and unlisted companies are eligible to obtain this newfound finance source, given that the following criteria are met:
- It must be a non-financial company.
- Its Net Worth must be at least ₹500 crores.
- It must have been profitable for the past 3 years.
- Unlisted companies must have a credit-grading of at least BBB-, which signifies adequate investment capacity, subject to economic conditions. These are granted by SEBI-registered Credit Rating Agencies like CRISIL, ICRA, and CARE.
The RBI has stated the maximum exposure limits for Banks for acquisition financing. A bank’s total capital market exposure should not exceed 40% of its eligible capital base. From this 40% cap, not more than 20% can be directed towards acquisition financing. This is a significant increase from the 10% cap that was initially proposed during the October 2025 announcement.
Impact on the Market
Cheaper Capital: The new changes provide acquirers with a new alternative to the previously expensive foreign and private credit funding. The cost of acquisition will be substantially lowered, and this provides grounds for expanding Management buyouts and leveraged buyouts.
New wave of consolidation: Analysts predict at least a 10-15% increase in M&A deals in 2026 from the previously recorded transactions worth $113 billion in 2025, signifying financial opportunities for the banking sector and significant growth in deal activities in sectors like technology, manufacturing, infrastructure, etc.
Pressure on Private Equity: Given that banks now have the permission to finance M&A deals, previously followed alternatives like private equity will be severely impacted by this change, potentially compressing yields and altering competitive positioning in the financing market.
Conclusion
After seven decades of sitting outside India’s deal rooms, domestic banks have finally been let in. This isn’t just a policy or a technical amendment; rather, it redefines how corporate India funds its growth ambitions. The real results of this change shall be visible as the first wave of deals comes to a close and the market discovers how banks will develop for this lending segment.
References:
- Notifications – Reserve Bank of India. (n.d.). https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13297&Mode=0
- Shardul Amarchand Mangaldas & Co. (2026, February 17). RBI opens the door to bank-led acquisition finance: A watershed moment for Indian M&A – Shardul Amarchand Mangaldas & Co. https://www.amsshardul.com/insight/rbi-opens-the-door-to-bank-led-acquisition-finance-a-watershed-moment-for-indian-ma/
- Puneet Shah, & Abhishek Singh. (2026, March 16). RBI’s new acquisition finance framework: A regulatory shift towards bank-financed acquisitions in India. Bar And Bench – Indian Legal News. https://www.barandbench.com/view-point/rbis-new-acquisition-finance-framework-a-regulatory-shift-towards-bank-financed-acquisitions-in-india
- Trilegal. (2026, February 24). The Unlock: RBI empowers banks to fund acquisitions – Trilegal. https://trilegal.com/knowledge_repository/trilegal-update-the-unlock-rbi-empowers-banks-to-fund-acquisitions/
- Ai, M. (2026, March 22). RBI reshapes M&A: Banks can now fund 75% of acquisitions. Multibagg AI. https://www.multibagg.ai/market-pulse/articles/rbi-ma-financing-rules-2026-cmn22vnr3rgbrs30jk6vokkjw
