RBI M&A funding: banks ready Rs 10,000 crore for deals

Mumbai: Indian banks have financed about a dozen mergers and acquisitions worth more than Rs 10,000 crore since July 1, after the Reserve Bank of India eased its rules on takeover financing, people familiar with the matter told The Economic Times. Domestic lenders can now fund up to 75% of a deal's value, and RBI M&A funding has quickly become one of the fastest-growing lines of corporate credit.

State Bank of India has been the most active lender, with nearly a dozen transactions either completed or in various stages of execution, the people said. HDFC Bank, Kotak Mahindra Bank, ICICI Bank, Axis Bank and RBL Bank have also taken part in acquisition financing in recent months, alongside foreign lenders HSBC, Citibank, MUFG and Barclays.

Industry estimates put the potential acquisition financing market at nearly Rs 2 lakh crore. Over the past three years, annual M&A deal values in India have averaged close to $50 billion, but the old restrictions had left most of the financing to overseas lenders, private credit funds and internal corporate resources. The Indian banking sector is now placed to reclaim a share of that business.

"Demand for acquisition financing is picking up, with over a dozen transactions closed with various banks since July," said Anu Aggarwal, head of corporate and transaction banking at Kotak Mahindra Bank. "Depending on the size of the transaction, we at Kotak either fully fund it from our balance sheet or we underwrite and syndicate it."

What the new RBI M&A funding rules allow

The revised RBI guidelines permit banks to finance up to 75% of an acquisition's value, a sharp change from the near-total bar that applied before. Merger acquisition loans are now treated as a legitimate line of corporate lending, and RBI guidelines give banks clear room to structure takeover debt. For acquirers, the change means cheaper domestic debt can replace costlier private credit or offshore borrowing.

Domestic banks had watched foreign lenders dominate this business for years. With RBI M&A funding now available, they can compete on pricing and long-standing client relationships. Merger acquisition loans also generate fee income from escrow accounts and share transactions, adding to interest earnings.

SBI at the front of RBI M&A funding activity

SBI's pipeline of nearly a dozen deals makes it the clearest early mover among domestic lenders. Its balance sheet allows it to underwrite large tickets and then syndicate them to other banks. HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank have each joined recent transactions, often working with foreign banks on the larger syndications.

One transaction cited by sources is Crystal Crop Protection's acquisition of FMC Corporation's India business. Bankers said demand for RBI M&A funding is rising across sectors, with acquirers who once had to borrow abroad now able to raise debt at home. The Indian banking sector has the distribution and the client access to intermediate these deals.

The scale of the RBI M&A funding opportunity

The nearly Rs 2 lakh crore estimate for the acquisition financing market suggests the Rs 10,000 crore deployed so far is only a fraction of the potential. Corporate lending in India has long centred on working capital and project finance. RBI M&A funding adds a higher-margin product to that mix, and banks earn arrangement fees when they underwrite and syndicate large tickets.

Risks remain. Aggressive underwriting can leave banks holding exposure if an acquisition underperforms, and corporate lending in India is cyclical by nature. For now, lenders are moving carefully, picking deals with strong cash flows and established sponsors.

Private credit funds, which filled the gap when banks were barred from takeover lending, now face direct competition from RBI M&A funding. Borrowers gain negotiating power as more lenders bid for mandates. Whether the Rs 2 lakh crore estimate materialises will depend on deal flow holding up through the rest of the financial year.