M&A funding norms open up a $15-b opportunity for banks

Mumbai: Indian banks with strong investment-banking capabilities such as Kotak Mahindra Bank, State Bank of India, ICICI Bank and Axis Bank are best placed to benefit from liberalised merger and acquisition financing rules, as established competences and strong balance sheets will give them early visibility into upcoming opportunities.

Bankers say the key changes in the new rules-allowing financing of up to 75% of an acquisition's cost, a 3:1 debt-equity ratio and doubling of the total acquisition finance cap to 20% of a bank's Tier-1 capital-give them room to build a business where none existed earlier.

The final guidelines announced by the Reserve Bank of India, such as extending eligibility to unlisted companies and permitting funding for substantial creeping acquisitions, are more liberal than earlier, said Anu Aggarwal, head of corporate & transaction banking at Kotak Mahindra Bank.


Kotak is already gearing up for this opportunity. "For us at Kotak, this aligns well with our strong investment banking franchise and creates a compelling opportunity to deepen corporate relationships. We expect this avenue to meaningfully support corporate credit growth for domestic lenders," said Aggarwal, who is also a director at Kotak Mahindra Capital Co, the lender's investment banking arm, giving her a good sense of the opportunities on the anvil.

Pratik Shah, partner and national leader of financial services at EY India, said over the past three years, annual deal values in India have averaged close to $50 billion, but domestic banks could not participate in acquisition funding, leaving the opportunity largely to offshore lenders, private credit funds and internal corporate reserves.

"The amended framework materially reshapes this landscape. Industry estimates indicate that nearly 35% to 40% of India's M&A value is bankable under conventional credit criteria. Even under conservative assumptions, the reforms unlock a potential $10-15 billion annual opportunity for Indian banks-representing a sizeable, scalable, and structurally recurring lending segment," Shah said. "Even modest bank participation could materially deepen India's M&A financing ecosystem and reduce dependence on offshore credit markets."

Shah said acquisition financing could emerge as an attractive, high-value asset class for banks offering superior spreads, structuring fees, and multi-dimensional revenue opportunities. Beyond lending, banks will also benefit from advisory mandates, underwriting roles, syndication fees, escrow services and treasury products, making it a strategic franchise enhancer.

Barclays India chief executive Pramod Kumar said the new rules will bring more players into the market and increase competition, but foreign banks will still be at play because local lenders will not be able to fund transactions with more than three times leverage.