RBI Monetary Policy: India's Central Bank Opens Door For Banks To Finance Acquisitions, Expands Lending Scope

The Reserve Bank of India has announced the proposal of a framework set to enable Indian banks to finance corporate acquisitions, a move that could reshape the landscape of deal-making in India. The announcement came as part of the central bank’s bi-monthly monetary policy statement, delivered by Governor Sanjay Malhotra.

Earlier, Indian banks have been barred from funding mergers and acquisitions, forcing companies to rely on non-banking financial institutions or bond markets for such transactions. The new framework is expected to permit banks to provide credit for corporate acquisitions within the scope of the RBI’s new framework

“To expand the scope of capital market lending by banks, it is proposed to provide an enabling framework for Indian banks to finance acquisitions by Indian corporates,” Governor Malhotra said, outlining one of five key measures to improve credit flow in the economy.

The RBI emphasised that while the Large Exposure Framework already addresses credit concentration risks at the individual bank level, systemic risks will be managed through macroprudential tools as needed.

The move also aligns with recent industry's expectations. Last month, State Bank of India Chairperson Challa Sreenivasulu Setty urged the regulator to permit acquisition financing, starting with listed entities, according to a report by Reuters.

In addition to the acquisition finance framework, the RBI announced several other regulatory relaxations to boost capital market lending:

• Ceiling removed on lending against listed debt securities.

• Limit increased for lending against shares from Rs 20 lakh to Rs 1 crore per individual.

• IPO financing cap raised from Rs 10 lakh to Rs 25 lakh per person.

While the benchmark repo rate was held steady at 5.5%, the central bank signaled that space for further monetary action has opened up, though it remains cautious about additional rate cuts in the near term.