The RBI’s M&A Gambit: Unlocking India Inc’s Deal-Making Potential or Planting the Seeds of the Next Credit Crisis? 

In a landmark decision that meets a long-standing demand from the banking industry, the Reserve Bank of India (RBI) has permitted Indian banks to finance mergers and acquisitions (M&As) of domestic non-financial corporates, a space previously ceded to costlier private credit funds and foreign lenders. This move aims to inject new life into lackluster corporate credit growth by unlocking a potential ₹1.2 trillion in lending, fostering industry consolidation, and allowing strong companies to acquire assets at attractive valuations.

However, the move is fraught with risks, primarily the potential for asset-liability management (ALM) mismatches as banks use short-term deposits to fund long-term acquisition loans, alongside concerns over a skill gap in underwriting complex deals and the perennial danger of fueling corporate over-leverage, challenging banks to navigate this new frontier with prudence to avoid sowing the seeds of a future credit crisis.

The RBI’s M&A Gambit: Unlocking India Inc’s Deal-Making Potential or Planting the Seeds of the Next Credit Crisis? 

In a move that signals a profound shift in the regulatory psyche, the Reserve Bank of India (RBI) has thrown open the doors for Indian banks to finance corporate mergers and acquisitions (M&As). This isn’t just a minor regulatory tweak; it’s a strategic decision that recalibrates the relationship between India’s banking sector and its corporate ambition. While it presents a multi-billion dollar opportunity to spur a new wave of industry consolidation, it also forces a critical question: Are Indian banks, with their historical baggage, ready to navigate the high-stakes, high-risk world of acquisition financing? 

For decades, the RBI maintained a prudent, almost paternalistic, stance. The central bank’s primary mandate was to ensure that the nation’s banking system, the lifeblood of the economy, was not exposed to the perceived perils of M&A deals. The fear was threefold: 

• Over-leverage: Financing acquisitions, especially at the holding company level, could load up corporate balance sheets with debt not directly tied to productive asset creation. 

• Promoter Funding: It could become a backdoor for funding promoter-level acquisitions, separating control from cash flow and increasing systemic risk. 

• Speculative Bubbles: Easy credit could fuel acquisitions based on financial engineering rather than industrial logic, creating asset bubbles. 

This caution, while well-intentioned, had a tangible consequence: it ceded a lucrative and strategic lending segment to non-banking financial companies (NBFCs), private credit funds, and foreign lenders. Indian corporates with ambitious acquisition plans were forced to tap into these alternative sources, often at significantly higher costs of capital. The RBI’s announcement on October 1st, 2025, is a tacit acknowledgment that a modern, mature economy requires a more sophisticated financial ecosystem. 

The Scale of the Opportunity: A ₹1.2 Trillion Jolt to Corporate Credit 

The potential is staggering. As highlighted by SBI Research, M&A deals in FY24 alone were valued at over ₹10 trillion ($120 billion). A conservative estimate, assuming a 40% debt component and banks capturing 30% of that financing, reveals a potential credit growth of ₹1.2 trillion. 

This injection comes at a critical juncture. Corporate credit growth has been languishing at 6.5% year-on-year as of August, a significant drop from the 9.7% seen a year prior. Why the slowdown? Indian corporates have become financially savvy. They are sitting on huge cash piles from years of deleveraging, and for their funding needs, they are increasingly bypassing traditional banks in favor of equity markets, debt capital markets, and overseas borrowing. 

The RBI’s own data confirms this trend: non-bank sources have pumped ₹2.66 trillion into the commercial sector this year, more than offsetting a decline in traditional bank credit. By allowing M&A financing, the RBI is essentially giving banks a new weapon to compete and reclaim their relevance in the corporate funding landscape. 

Who stands to gain immediately? 

• MSMEs Seeking Consolidation: Smaller, strategic acquisitions by MSMEs to gain scale, technology, or market access can now be funded more cheaply. 

• Pharmaceutical and IT Sectors: These sectors are perennially active in M&A, often targeting niche players for their intellectual property or client roster. Bank financing can accelerate this innovation-driven consolidation. 

• Debt-Free, Cash-Rich Companies: Strong corporates looking to acquire distressed or fairly-valued assets within their sector can use bank debt to structure deals where the target company’s cash flows service the debt, creating a virtuous cycle. 

As Srinivasan Vaidyanathan of Essar Capital aptly noted, this provides “an excellent platform for strong Indian corporates… to acquire companies within their sector, which are otherwise available at attractive valuations.” 

The Strategic Imperative: Beyond the Balance Sheet 

This move is not just about lending more money; it’s about fostering a more dynamic and resilient corporate India. 

1. The “India Inc.” Consolidation Wave: Many Indian industries are fragmented. Allowing bank-financed M&As can catalyze consolidation, creating larger, more efficient national champions with the scale to compete globally. This leads to better utilization of assets, reduced operational redundancies, and enhanced pricing power.
2. Rescuing Distressed Assets: One of the most significant applications could be in the acquisition of stressed or bankrupt companies through the IBC process. Instead of these assets languishing, well-managed companies can use bank funding to acquire and turn them around, solving a persistent problem in the Indian economy.
3. Reducing the Cost of Capital: Private credit, while agile, is expensive. By bringing banks into the fray, the overall cost of acquisition financing for credible deals will come down, making more transactions viable and improving the return on investment for acquirers.

The Perils and the Prudence: Navigating the Minefield 

However, the euphoria must be tempered with extreme caution. The memories of the NPA crisis, fueled by reckless corporate lending, are still fresh. The risks this time are different, but no less dangerous. 

1. The Asset-Liability Management (ALM) Mismatch: This is the most significant red flag raised by experts like Vivek Iyer of Grant Thornton Bharat. Banks primarily fund themselves with short-term deposits. M&A loans, by their nature, are long-term. Using short-term liabilities to fund long-term assets creates a fundamental ALM mismatch. If not managed meticulously, a rise in interest rates or a withdrawal of deposits could cripple a bank’s liquidity position. The RBI must consider mandating that such loans be backed by specific long-term bonds or funds, creating a natural hedge.
2. The Skill Gap: M&A financing is not like funding a new factory. It requires a completely different skill set. Bankers need to be part-investment banker, part-risk analyst. They must deeply understand deal structuring, equity valuations, synergy realization, and the intricacies of post-merger integration. A bad bet here isn’t just about a defaulting company; it’s about betting on a failed strategic decision.

State Bank of India seems aware of this challenge, with an executive mentioning the need for a “centre of excellence to groom and nurture talent.” This cannot be an afterthought; it must be the cornerstone of their approach. 

3. Over-Leverage and “Winner’s Curse”: In the heat of a bidding war, companies can overpay. If banks are eager to lend, they might fuel this “winner’s curse,” where the acquirer wins the deal but at a price that makes it impossible to generate a return. The due diligence must extend beyond the borrower’s creditworthiness to the fundamental soundness of the acquisition itself.
4. Promoter Gaming: The old risk of promoter-level funding at holding companies remains. Strict guardrails must ensure that financing is directed towards the acquisition of operational, income-generating “non-financial entities,” as indicated by sources, and not for speculative, circular ownership structures.

The Road Ahead: A Framework for Sustainable Growth 

For this bold move to succeed, it cannot be a free-for-all. The RBI’s “enabling framework” must be robust and clear. 

• Stringent Underwriting Standards: Banks should be required to demonstrate that the acquired entity’s cash flows are sufficient to service the debt, minimizing reliance on the acquirer’s existing balance sheet. 

• Exposure Limits: The RBI should impose sectoral and single-borrower exposure limits for M&A loans to prevent dangerous concentrations. 

• Transparency Mandate: Starting with listed companies, as SBI’s C S Setty suggested, is a wise first step. The transparency and shareholder approval inherent in such deals provide a natural check and balance. 

• Higher Provisioning Norms: Given the inherently higher risk, the RBI could consider mandating higher provisioning requirements for acquisition loans, forcing banks to price the risk appropriately. 

The RBI has handed Indian banks a double-edged sword. Wielded with skill, prudence, and rigorous risk management, it can help carve out a new era of corporate growth and global competitiveness for India. Used recklessly, it could sow the seeds of the next non-performing asset crisis. The ball is now in the banks’ court to prove they have learned the lessons of the past and are ready for the sophisticated challenges of the future. The journey from traditional lenders to strategic financiers has just begun.