In a historic change of policy, the Reserve Bank of India (RBI) has allowed banks to finance corporate acquisitions under prudential norms through its Developmental and Regulatory Policies statement dated October 1, 2025. This has major legal, financial, and business effects on India’s credit system.
Indian banks used to not be able to give loans for equity purchases or leveraged buyouts because they were worried about asset-liability mismatches, concentration issues, and the risky use of depositor funds. As a result, most of the money for acquisitions in India came from offshore lenders, capital markets, and non-bank financial institutions (NBFCs), with banks playing a small role.
The statement in October 2025 shows that regulators are intentionally loosening their rules. Soon, precise prudential principles will set clear limits on how businesses can operate.
Regulatory Change: From Banning to Allowing
The RBI’s previous position, based on the Banking Regulation Act of 1949 and its Master Circulars on Loans and Advances, said that acquisition finance was speculative, especially when it was used to buy controlling stakes instead of producing assets.
India’s financial and legal systems have grown up a lot in the last ten years, though. The Insolvency and Bankruptcy Code (IBC), 2016, made banks more resilient by improving capital sufficiency under Basel III and making risk management techniques stronger. At the same time, the corporate M&A ecosystem has grown, requiring structured and creative finance solutions across many sectors.
Effects on sectors and transactions
Allowing banks to offer acquisition financing is likely to change how mergers and acquisitions are set up, especially in industries like infrastructure, power, telecom, manufacturing, and financial services, where consolidation can make things bigger and more efficient.
This change makes it easier for Indian companies to get funding for acquisitions from domestic banks, which means they don’t have to rely as much on foreign capital. It gives banks a new way to make money, making them strategic financiers of corporate mergers instead of just regular lenders.
What this means for private credit and NBFCs
The RBI’s decision will change the way private credit funds and NBFCs compete for acquisition finance, which they have historically dominated. These companies are known for offering flexible acquisition loans with higher yields, but they may now have to deal with lower margins if big structured deals move to regulated banking channels.
But adding banks will probably make the acquisition finance market more open, better run, and better at setting prices.
Global Alignment and Regulatory Convergence
Bank-led acquisition financing is a common and regulated activity all across the world:
In the US, banks regularly underwrite and syndicate leveraged loans with the help of the Federal Reserve and the OCC.
Under Basel rules, purchase bridge loans are refinanced in the capital markets in Europe and the UK.
Singapore and Hong Kong, which are important financial centers, have set up organized regulatory frameworks for acquisition finance that are linked to strong risk controls.
India’s previous ban set it apart from other big economies. The new framework fills this gap by bringing India up to speed with more developed global markets and adding context-specific safety measures.
Legal and Financial Protections
Acquisition financing has a lot of legal and credit risks, such as:
Risks of payback linked to events, depending on how well the deal goes and how well the company does after the merger.
Security agreements, such as share pledges and promises that are linked to getting regulatory licenses.
Compliance includes following the Companies Act, 2013, the SEBI Takeover Code, rules for foreign investment, and approvals that are exclusive for certain sectors.
The RBI’s upcoming prudential guidelines are expected to spell out how to handle capital, set provisioning standards, set exposure limits, and set risk weights. These rules will have to be in conformity with Section 20 of the Banking Regulation Act, which prohibits connected lending to protect depositors’ interests.
A planned liberalization that has an effect on the whole system
This strategy is a careful step toward liberalization that makes sense from a legal, economic, and regulatory point of view. If done carefully, it could:
Structured financing can help India’s domestic credit markets grow.
Allow companies to merge and grow strategically;
Cut down on reliance on foreign capital;
Improve the resilience of the system and make sure it meets worldwide regulatory standards.
The success of this project will depend on good design, risk management, and responsible borrowing by businesses. It also forces private credit providers to raise their standards for governance and compliance, which will help India’s acquisition finance industry grow in a way that lasts.
The October 2025 policy is not just a change in the rules; it changes the way banks work in India. It makes domestic banks the main drivers of corporate growth through mergers and acquisitions, and it also adds legal, prudent, and risk-aware systems to the country’s financial system.