The Reserve Bank of India has updated regulations to allow banks to fund up to 75% of corporate acquisition values. This move is expected to increase competition in the private credit market, which has grown to $25 billion. While borrowers may benefit from lower costs, the entry of traditional banks could squeeze the high yields currently enjoyed by private credit funds.
What Happened
The Reserve Bank of India (RBI) has introduced new guidelines allowing banks to provide financing for corporate acquisitions. Financial institutions can now fund up to 75% of the transaction value in these deals. Historically, this type of financing was primarily managed by private credit providers, also known as alternative investment funds. This regulatory shift essentially opens a new revenue stream for banks while providing corporate buyers with more options to secure capital for takeovers and mergers.
How the Market May Shift
This change is set to alter the competitive landscape of India's private credit market, which has reached an estimated $25 billion in assets under management. Until now, private credit funds were the go-to source for many acquisition deals, often charging higher interest rates to compensate for the higher risks they took compared to traditional lenders.
With banks now entering the fray, the direct competition is likely to intensify. Banks typically have access to a lower cost of funds through deposits compared to private credit funds. This competitive advantage might lead to lower borrowing costs for companies, but it may also compress, or reduce, the profit margins and yields that private credit funds have been earning on such loans.
Private Credit vs. Traditional Banks
While banks gain a new opportunity, they also face their own limits. Moody's Ratings has noted that banks and non-banking financial companies (NBFCs) continue to face constraints on their overall lending capacity. Furthermore, banks have been focused on protecting their asset quality, meaning they may remain selective about which acquisitions they choose to finance.
This creates a scenario where banks might target the safer, higher-quality deals, potentially leaving private credit funds to continue serving the niche or riskier segments of the market. The private credit sector in India has been supported by regulatory reforms like the Insolvency and Bankruptcy Code (IBC) and specific frameworks for investment funds, which helped the sector grow. Currently, real estate accounts for about 40% of this market, with infrastructure and utilities making up the other major portions.
Risks and Investor Concerns
Investors and market participants should consider several factors that could influence this shift. For foreign investors operating in the private credit space, withholding taxes on interest income continue to be a hurdle. These taxes, combined with potential risks from currency depreciation, can reduce overall returns for overseas capital. To offset these costs, foreign investors often have to seek higher returns, which may become more difficult if competition from domestic banks forces interest rates down.
What Investors Should Track Next
The key monitorables for the coming quarters will be how aggressively banks use this new permission to fund acquisitions and whether this leads to a noticeable decline in interest rates for corporate deals. Investors may also want to observe if private credit funds shift their focus toward more complex or bespoke transactions to avoid head-to-head competition with banks. Finally, any data on bank asset quality regarding acquisition financing will be an important indicator of how comfortable the regulator remains with this expansion.