The last decision of the RBI marks a decisive turning point in the evolution of company financing in India. By enabling banks to finance mergers and acquisitions (M & AS) by domestic companies, the central bank has opened a space that was previously forbidden for banks. This change works outdated guidelines on exposure to the capital market and brings Indian bank practices closer in accordance with global standards. It not only answers long -term requirements of the banking sector, capital markets and companies, but also positions banks to participate in one of the fastest growing areas of business activities.
Historically, Indian banks were not allowed to finance acquisitions directly due to concern that such exposure could destabilize their balance sheets. However, as I have argued in my earlier paper, acquisition financing must be seen as loans based on the cash flows of the Target Company. This therefore does not necessarily increase the risk of a bank in the capital markets.
In the absence of bank participation in this space, companies have turned to bond markets, commercial paper, external loans and internal overbouw over the years to finance their acquisitions. Private credit funds, non-banking financing companies (NBFCs) and foreign money lenders stepped into the vacuum and conquered a market that quickly grew. This reform offers Indian banks the opportunity to re -introduce a space with a high potential, exactly at a time when business consolidation reforms the business landscape of India. In the 2024 financial year alone, mergers and acquisitions in India amounted to the USD 120 billion. If even half of those deals were to use the financing of debts and banks would provide part of that financing, the extra credit option could be tens of billions of dollars.
The timing of this reform could not have been better. The M&A market of India witnesses a strong momentum with sectors such as medicines, technology, financial services and production that undergo considerable consolidation. Because companies strive for scale, access to new markets and technological upgrades, the need for structured acquisition financing will only rise. Initially, banks can limit themselves to borrowers with strong balance sheets and low leverage, but with time, because they gain experience and build up capacity, they will inevitably expand to larger and more complex deals. This reform will enable them to gradually reclaim the market share of non -Bank -Credit providers and foreign institutions that have so far dominated the Indian mergers and acquisitions.
However, entering the financing arena requires more than approval of the regulations. In contrast to traditional working capital or term loans, where collateral or assets cover often offers comfort, acquisition financing is inherently complex and required specialized skills. It requires the possibility to evaluate the future cash flows of Target Company, to assess models after acquisitions of synergies and the reimbursement capacity in the context of different scenarios. To succeed, banks must develop their expertise in the field of M&A Advisory and Underwriting that combines credit risk analysis with due diligence style in investment banking. In the course of time this could deepen the talent pool within Indian Banking and the line somewhat fade the line that traditionally separate credit and deal functions. In Samente, the policy change of the RBI is more than a regulatory update, it is a chance of changing games. By unlocking M&A financing for Indian banks, it paves the way for them to actively support the next wave of business growth in India. With the right possibilities, banks can go from the sidelines to the center of business transformation. This shift by RBI is not only a policy adjustment, it is a strategic green light for banks to position itself in the heart of the business future of India.
as a reliable and trusted news source#RBIs #Knik #Banks #Center #Business #Deals