In a major and much-talked policy shift, the Reserve Bank of India (RBI) has finally allowed the domestic banks to finance mergers and acquisitions (M&A) which are done by Indian corporates.
This move is been called one of the most forward steps by the regulator in recent times and it is expected that it can totally change the way India’s corporate funding system works. For the first time ever, Indian companies will not have to depend only on foreign banks, NBFCs or private credit funds for getting money to do acquisitions.
It looks like the RBI wants to push India’s banking system towards a more global level and the timing could not have been better. Let’s understand why this move can mark a new beginning for Indian corporate finance and what is exactly going to change
The Policy Shift – What Has Changed Now?
Earlier, Indian banks were mostly not allowed to give loans for mergers or acquisition purposes. So, companies who wanted to buy or merge another business had to look for different capital sources like:
- Venture capital firms or private equity investors
- Lenders sitting outside India
- Selling company’s own shares to raise money
Because of this rule, Indian corporates were growing but Indian banks were left out of one of the most profitable opportunities in finance.
Now, this has been changed. The RBI’s decision is now allowing domestic banks to take part in M&A lending. This has completely shifted the balance and made Indian banking system more similar to other developed markets where such practices are already happening for many years.
Why This Move Matters for Everyone
1. Better Access to Money for Corporates
Due to this new reform, Indian companies will be able to get structured loans for acquisition directly from domestic banks.
This means they don’t have to go running behind offshore funding or wait for foreign approvals. The process is now faster, cheaper and much more regulated which helps both big and mid-size businesses to grow.
2. A Big Edge for Indian Banks
Banks such as Axis, ICICI, and HDFC now stands to gain from this move. The M&A financing segment was earlier mostly captured by global institutions, but now Indian banks can also play in this space.
This will not only expand their credit portfolio but will also help them to earn more fee income from advisory, documentation and structuring deals.
3. Boost in Credit Growth and Economy
According to market experts, the total value of M&A deals in India during FY24 was around $120 billion, and if even 40% of this amount is debt-financed, then banks can possibly lend nearly ₹1.2 trillion.
That’s a huge number which can give a major push to credit growth and overall liquidity flow in the system.
4. Matching Up with Global Practices
In most developed countries, local banks are regularly funding big mergers and buyouts. India was behind on this front for long time.
Now with this new step, the RBI has made Indian financial ecosystem more aligned with global standards and improved investor confidence that the domestic system can handle complex corporate funding activities.
Reverse Mergers: The Hidden Opportunity
This policy can also make a big difference in the space of reverse mergers, which is a popular route for unlisted companies who wants to get listed or expand faster.
Now with local financing support:
- Growing companies can merge easily with listed firms
- Promoters can raise money through debt instead of selling their shares
- Sectors like fintech, energy, and manufacturing can see more consolidation as scale becomes more important
At MUDS Management, we have already been working with several companies in the area of IPOs, reverse mergers, and corporate restructuring, and this move by RBI is expected to make such transactions more feasible.
By combining proper bank financing with regulatory expertise, Indian corporates can finally take expansion decisions with more confidence and lesser dependency on foreign lenders.
Possible Risks and Challenges
While the decision looks very positive, there are also few challenges that both banks and companies should think about before taking the advantage of this new freedom.
1. Asset and Liability Mismatch
Since M&A financing is often long term, banks need to make sure that their fund sources are also long-term. Otherwise, repayment timing mismatches can create stress on liquidity and asset quality later.
2. Exposure to Risky Sectors
If banks start lending too much in volatile industries like tech or real estate, it might create big non-performing loans in the future. That’s why proper due diligence and background checking should always be done before any funding is approved.
3. Stronger Governance is Needed
The RBI will probably keep a strict watch on how these loans are being given. Banks will need to evaluate each deal carefully, look at financials, repayment capacity, and whether the merger itself makes sense or not.
So even though it’s a big opportunity, it also needs a disciplined risk management system to make it sustainable.
A Broader Perspective
This step by RBI is not only about giving banks a new lending opportunity. It is actually about showing confidence in India’s corporate maturity.
It proves that Indian businesses have now become capable of handling large-scale financial transactions and that Indian banks have reached a level where they can support them effectively.
On a bigger level, this will:
- Deepen Indian capital markets
- Improve money circulation inside the country
- Attract more foreign direct investment (FDI)
- Make India’s business environment more trustworthy globally
It connects growth, compliance, and globalization in one single move.
Conclusion – A Big Step Forward for India’s Financial Future
The RBI’s decision to let domestic banks finance M&A deals is definitely going to be seen as a historic change in the Indian finance industry.
It gives Indian corporates a chance to grow faster, provides banks a brand new business area, and makes India a more self-reliant financial hub.
At MUDS Management, we believe this policy will encourage more corporate restructuring, reverse mergers, and IPO activities in the coming years.
India is now standing at the edge of a new financial era — one where the capital and capability finally meets, right inside the domestic ecosystem itself.