Can cheaper bank funding spark India's next M&A cycle after RBI move?

Banks can now finance acquisitions under RBI's revised framework; experts say lower borrowing costs may improve deal economics, but valuations and strategic fit will continue to drive M&A decisions

Commercial banks can now finance mergers and acquisitions under the Reserve Bank of India's (RBI's) new acquisition finance framework, which came into effect on July 1, opening a new source of funding for corporate takeovers.

 

Until now, companies largely relied on internal cash, private credit funds, non-banking finance companies (NBFCs), offshore lenders and equity fundraising to finance acquisitions, often at a higher cost than conventional bank loans. The RBI's move is expected to broaden funding options and improve access to capital, particularly for eligible mid-sized companies. But will cheaper bank funding simply replace existing financing sources, or help unlock a new phase of mergers and acquisitions in India?

 

Why banks stayed away from acquisition finance

The RBI has long been cautious about allowing banks to lend against acquisitions because such transactions are inherently riskier than conventional corporate loans. If an acquisition fails to generate the expected returns, the borrower's repayment capacity can weaken, while the value of the acquired business may also decline, exposing banks to higher credit risk.

 

"The RBI's decision marks a structural shift by allowing banks to enter acquisition finance, an area that was earlier dominated largely by private credit funds," Vivek Iyer, partner and financial services risk leader at Grant Thornton Bharat, told Business Standard. However, he noted that the framework is designed primarily for larger scheduled commercial banks and listed borrowers with strong financials and governance standards.

What changed from July 1?

The RBI's revised framework, which came into force on July 1 after a three-month deferment, formally allows commercial banks to finance acquisitions within clearly defined prudential limits. The central bank has simultaneously withdrawn the earlier notification and replaced it with a revised set of directions after incorporating industry feedback.

 

The RBI has introduced several guardrails to ensure acquisition finance does not become excessively risky. These include limits on bank exposure, borrower eligibility conditions, valuation requirements, and risk-weight prescriptions. The framework also seeks to prevent excessive leverage while allowing banks to compete in a segment that has historically been served by private credit funds and specialised lenders.

Will cheaper funding lead to more acquisitions?

According to industry experts, lower-cost funding can certainly improve the economics of a transaction, but it is unlikely to become the primary reason companies pursue acquisitions.

 

"Access to bank funding doesn't create an acquisition strategy, it enables one," Rahul Sharma, chief financial officer at BLS E-Services Ltd, told Business Standard. "The real question is whether an acquisition accelerates capabilities that would otherwise take years to build organically. Bank funding can certainly make execution faster, but it should never become the reason to pursue a deal."

 

Sharma said the cheapest capital can still become the most expensive decision if the underlying business lacks strategic relevance.

 

"Financing cost is an important lever for optimising returns, but value creation depends far more on strategic fit, cultural alignment, integration capability and the target's ability to generate sustainable cash flows," he said.  The market is already beginning to test the new framework. In one of the earliest transactions under the revised norms, HSBC India funded Waaree Renewable Technologies's ₹1,255-crore acquisition of a 55 per cent stake in Associated Power Structure.

 

For most acquirers, financing is only one part of the equation. The strategic rationale behind a deal, the target company's valuation, integration capabilities, future growth prospects and broader business confidence continue to carry greater weight in boardroom decisions.

 

Anish Maheshwari, founder and chief executive officer of ViSURE Investment Affairs, said access to cheaper capital is an enabler, not the trigger. "Acquisitions happen when there is strategic intent, confidence in future growth, and the right valuations. This framework makes execution easier, but businesses will still buy for value, not simply because funding has become cheaper," he told Business Standard.

 

Industry executives also said easier access to institutional debt could still prove meaningful, particularly for India's mid-market companies. Unlike large conglomerates, which often finance acquisitions through internal accruals or diversified funding sources, mid-sized listed companies frequently face greater constraints in accessing affordable capital.

 

Iyer said acquisition financing through banks removes entry barriers for inorganic growth for mid-market listed companies, which may not always attract interest from private credit funds. "It is not just the cost of funds but also access to funds that could become the real game changer," he said.

 

Industry executives also believe the framework could encourage companies to pursue acquisitions that strengthen capabilities rather than merely expand scale. Easier access to institutional funding could help companies acquire niche technologies, enter new geographies and accelerate digital transformation without excessive reliance on equity dilution.

 

Yuvraj Bhardwaj, chief executive officer and co-founder of Plannex Recycling, said the framework is particularly relevant for fragmented sectors where acquisitions can deliver scale much faster than building capacity organically.

 

"Access to structured bank funding certainly makes inorganic growth a more viable strategic option," Bhardwaj said. "Sectors like recycling and resource recovery are highly fragmented, with many regional players possessing valuable assets, specialised capabilities and strong local collection networks."

 

However, experts cautioned against expecting an immediate surge in M&A activity.

 

Deal volumes will continue to depend on broader economic conditions, corporate confidence, valuation expectations and interest rates. If buyers and sellers remain far apart on valuations, cheaper financing alone is unlikely to bridge that gap.

 

"Every new regulatory framework creates an impact. It may not immediately transform the M&A market, but over time it can reshape the landscape and encourage greater deal activity," Maheshwari said.

Who stands to benefit?

The biggest beneficiaries are likely to be companies that have long viewed acquisitions as an important growth strategy but lacked access to affordable institutional debt.

 

Experts believe mid-sized listed companies stand to gain the most. Sharma said the framework could accelerate a new phase of consolidation among India's mid-market companies, provided they maintain disciplined capital allocation and governance standards.

 

Bhardwaj also expects greater consolidation in fragmented industries. "This is particularly relevant for sectors such as waste management, recycling, environmental services and manufacturing, where the market remains fragmented," he said. "Greater access to institutional financing could improve operational efficiencies and help companies build stronger national platforms."

 

Maheshwari identified infrastructure, health care and financial services among the sectors most likely to benefit because acquisitions in these industries are often capital-intensive and closely linked to long-term growth opportunities. He also expects manufacturing, logistics, consumer businesses and technology companies to actively evaluate acquisition opportunities as valuations become more attractive.

Are banks ready?

The opportunity for banks, meanwhile, extends beyond simply adding another loan product.

 

Acquisition finance requires a fundamentally different approach from conventional corporate lending. Banks need to evaluate not only the borrower's repayment capacity but also the strategic rationale behind the acquisition, integration risks, future cash flows and valuation assumptions.

 

That is where some experts see the biggest challenge.

 

"The RBI's prudential limits around product exposure, sector exposure and risk weights provide good regulatory boundaries," Iyer said. "However, the quality of underwriting is a significant concern because this product requires much more of an investment banking mindset than a plain vanilla banking mindset."

 

He also pointed to talent shortages as a potential hurdle as banks build specialist acquisition finance teams.

 

Maheshwari believes banks are unlikely to immediately displace private credit funds because they already operate within established lending frameworks and credit policies.

 

"I don't think this will immediately disrupt private credit," he said. "Instead, it expands the financing ecosystem. There will continue to be space for private credit providers alongside banks."