The Reserve Bank of India (RBI) has recently introduced transformative norms surrounding mergers and acquisitions (M&A) funding, creating a massive $15 billion opportunity for Indian banks. This bold regulatory shift allows banks to step into a space traditionally dominated by non-bank financial companies and private funds—providing funding for corporate acquisitions both domestically and overseas and unlocking fresh growth potential for the banking sector.

Historically, Indian banks were restricted from financing M&A deals, forcing companies to turn to alternative lenders such as NBFCs and private credit funds for acquisition debt. The RBI’s new framework aims to change that by permitting banks to provide loans for acquiring full or controlling stakes in target companies. This is a significant leap forward in developing India’s capital markets and encouraging strategic investments.

The policy is designed to strike a careful balance. While it opens the floodgates for bank financing in M&A, it also institutes prudent safeguards to avoid over-leveraging. Acquirers are required to bring at least 30% of the acquisition value from their own funds, ensuring they have “skin in the game.” Moreover, the total debt availed for the transaction must not exceed a 3:1 debt-to-equity ratio, mitigating excessive risk for banks and borrowers alike.

This regulatory change is timely, given India’s growing appetite for consolidations and acquisitions amid evolving business dynamics and privatization plans. Public Sector Undertaking (PSU) divestments and the government’s push to offload stakes in several state-run entities provide fertile ground for such corporate actions. Banks, by gaining a foothold in M&A financing, could significantly expand their loan books and profit streams.

From a market perspective, the RBI’s announcement is expected to boost the volume and quality of M&A deals in India. Previously, businesses faced challenges in securing structured financing for large acquisitions, which often delayed or complicated deals. With banks now able to back these transactions, companies may find it easier to pursue strategic growth opportunities, whether to acquire domestic firms or expand overseas.

For banks, this is not just about loan growth but also about strengthening their role as strategic financial partners. By underwriting M&A financing, banks can deepen their relationships with corporate clients and participate in long-term value creation rather than just short-term lending.

There are, of course, strategic considerations for banks entering this space. They will need to rigorously assess the creditworthiness and strategic merit of M&A targets, particularly in a highly dynamic economic environment. Banks will also likely develop specialized teams and risk frameworks tailored to acquisition financing, given the complexity and scale involved.

Meanwhile, the RBI guidelines also specify loan-to-value (LTV) ratios for other market instruments like shares and debt securities, ensuring a comprehensive risk management approach across financial products.

In summary, the RBI’s new norms for M&A funding mark a pivotal shift in India’s financial ecosystem. This move could unlock a $15 billion opportunity for banks, energize strategic acquisitions, and ultimately contribute to a more vibrant and competitive corporate landscape. Both lenders and borrowers stand to gain, as the banking sector steps up as a key enabler in shaping India’s economic growth trajectory through mergers and acquisitions.