Domestic banks have deployed ₹10,000 crore for acquisitions since July after the Reserve Bank of India allowed them to fund up to 75% of deal values. This shift lets Indian lenders capture market share from foreign institutions and boost fee-based revenue. Investors should watch how banks manage the higher credit risks associated with these large corporate buyouts.
The landscape for Indian corporate deal-making has undergone a significant change following the Reserve Bank of India’s decision on July 1 to relax rules on takeover financing. By permitting domestic banks to fund up to 75% of an acquisition’s independently assessed value, the regulator has removed the hurdles that previously made Indian companies dependent on foreign banks or private credit funds for transaction capital. In the short time since these changes were implemented, domestic lenders have successfully deployed over ₹10,000 crore into various merger and acquisition transactions.
New Rules Boost Domestic Lender Activity
Large public and private sector banks have been quick to utilize these new guidelines to capture a bigger piece of the corporate advisory pie. State Bank of India has emerged as a key player, having spearheaded nearly a dozen such transactions. Other major lenders, including HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank, are also actively participating, often partnering with global firms like HSBC and Citibank to handle larger, complex syndications. This collaborative approach allows domestic banks to handle massive deal sizes while sharing the risk involved.
Why Banks Are Chasing M&A Mandates
For Indian banks, this shift is about more than just the interest earned on loans. By positioning themselves as the primary lead financier for an acquisition, banks gain access to a host of high-value services. These include managing foreign exchange, handling treasury and escrow accounts, and providing demat services to private equity partners involved in the deals. Recent activity, such as Crystal Crop Protection’s ₹2,268-crore purchase of FMC Corporation’s India business and Waaree Renewable Technologies’ ₹1,225-crore acquisition, highlights that banks are now comfortable backing both listed and unlisted corporate buyouts. Industry estimates suggest that the total addressable market for this acquisition-financing sector could eventually reach ₹2 lakh crore.
Assessing the Investor View and Risks
While this new financing avenue offers a significant growth opportunity for bank balance sheets, it is important for investors to note that acquisition financing is structurally riskier than standard working capital loans. These deals are often highly leveraged, meaning the debt taken to finance the buyout must be serviced by the cash flows of the acquired business. If the acquired company fails to perform or the integration process faces delays, the repayment capacity could be strained. The RBI has implemented strict risk-management guardrails to prevent excessive exposure, but the credit quality of these loans will remain a critical monitorable. As the M&A pipeline grows, the next major update for shareholders will be the quality of these loan books and whether banks can maintain their asset quality while aggressively pursuing these corporate advisory mandates.