India Set to Open $40 Billion M&A Market to Local Bank Funding

India’s central bank plans to permit local lenders to finance mergers and acquisitions, a move expected to boost the country’s $40 billion-plus deals market.

The Reserve Bank of India will soon propose a framework enabling banks to directly fund corporate takeovers, Governor Sanjay Malhotra said in Mumbai on Wednesday after the central bank kept interest rates unchanged.

The proposed relaxation in rules was part of a slew of measures announced by the RBI. It also plans to remove regulatory ceilings on lending against listed debt securities and enhance limits for lending against shares. The moves pushed the Nifty Bank index up 1.4% to trade at the day’s high.

The announcement comes at a time when corporate appetite for M&A is rising in India, fueled by healthier balance sheets, years of debt reduction, and strong domestic demand. The volume of domestic M&A has reached nearly $41 billion in 2025, a slight improvement from a year earlier, data compiled by Bloomberg News shows.

“The aim will be to promote stability, while at the same time improving competitiveness, encouraging and enhancing growth of the economy,” Malhotra told a news conference when asked about the easing on bank regulations.

Currently, lenders are barred from directly financing acquisitions due to regulatory and asset-quality concerns. Most corporates typically turn to non-banking financial companies, foreign lenders, or public and private markets.

India’s banking sector has undergone a major cleanup of bad loans in recent years, with gross non-performing asset ratios falling to multi-year lows.

Analysts expect foreign banks to be impacted by the new proposal. “If the RBI allows state-run banks to fund high rated M&A deals, then public sector banks will take share away from foreign banks who’ve been benefitting more from this regulatory arbitrage,” said Bharat Gupta, founder at Au-RRange Ventures, a research services firm.

Among other measures, Malhotra said the final guidelines will drop proposed limits on business overlaps between banks and their group entities, giving boards the freedom to decide strategic allocations.

He said the expected credit loss framework is proposed to apply to lenders from April 1, 2027, with a five-year glide path for implementation. The central bank, in January 2023, had released a discussion paper suggesting banks switch to the ECL method, in which lenders assess the probability of default upfront and provision accordingly, rather than after a default as is the current norm.

With assistance from Anto Antony.

©2025 Bloomberg L.P.

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