In a bold move that could reshape India’s corporate financing ecosystem, the Chairman of the State Bank of India (SBI), the country’s largest public sector lender, has publicly urged the Reserve Bank of India (RBI) to allow banks to directly fund corporate acquisitions. The proposal, if accepted, would mark a significant shift in India’s banking regulations and unlock new avenues for strategic mergers and acquisitions (M&A), particularly among large listed companies.
The Announcement
Speaking at a recent industry forum, SBI Chairperson emphasized the need for regulatory flexibility in acquisition financing. “We have requested the RBI to allow banks to fund acquisitions. We believe this can begin with large listed companies where transparency and governance are already well established,” the Chair said, signaling a push toward modernizing India’s financial architecture to support corporate consolidation and growth.
Currently, Indian banks face restrictions under RBI guidelines that limit their ability to finance acquisitions directly. These rules were originally designed to curb excessive leverage and protect financial stability. However, with India’s corporate sector maturing and global competition intensifying, industry leaders argue that it’s time to revisit these norms.
Why This Matters
India’s M&A landscape has traditionally relied on non-banking financial companies (NBFCs), private equity, and foreign institutional investors to fund large acquisitions. Banks, despite their deep balance sheets and long-standing relationships with corporates, have remained on the sidelines due to regulatory constraints.
Allowing banks to participate directly in acquisition financing could:
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Increase liquidity in the M&A market
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Lower borrowing costs for acquiring firms
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Strengthen domestic financial institutions’ role in strategic corporate growth
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Improve transparency and oversight, especially for deals involving listed entities
This move could be particularly impactful for sectors like infrastructure, manufacturing, and technology, where consolidation is often key to achieving scale and competitiveness.
Starting with Listed Companies
The SBI Chair’s suggestion to begin with large listed companies is a strategic one. These firms are subject to stringent disclosure norms, corporate governance standards, and regulatory scrutiny from SEBI and stock exchanges. By focusing on this segment initially, the RBI can test the waters while minimizing systemic risk.
Moreover, listed companies often engage in acquisitions to expand market share, enter new geographies, or diversify product offerings. Bank financing could provide a more stable and predictable funding channel compared to volatile equity markets or high-cost private debt.
Industry Reaction
The proposal has sparked widespread discussion among financial experts, corporate leaders, and policy analysts. Many view it as a long-overdue reform that aligns India’s banking sector with global best practices.
“Globally, banks play a central role in financing acquisitions. India needs to evolve in that direction if we want to support our companies in becoming global champions,” said a senior executive at a leading investment bank.
Others caution that any relaxation must be accompanied by robust risk management frameworks. “Acquisition financing can be risky if not done prudently. The RBI must ensure that banks have the necessary credit appraisal systems and capital buffers,” noted a former central banker.
What Comes Next
The ball is now in the RBI’s court. If the central bank responds positively, it could issue revised guidelines or initiate a pilot framework for acquisition financing by banks. This may involve:
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Defining eligibility criteria for borrowers
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Setting exposure limits for banks
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Requiring enhanced due diligence and board approvals
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Mandating periodic reporting and stress testing
The move could also trigger a wave of innovation in structured finance, with banks developing new products tailored to acquisition needs.
Broader Implications
This development comes at a time when India is positioning itself as a global investment hub. With the government pushing for privatization, infrastructure development, and digital transformation, enabling banks to fund acquisitions could accelerate strategic investments and boost economic growth.
It also aligns with the broader trend of financial liberalization, where regulators are gradually easing restrictions to foster innovation and competitiveness while maintaining systemic stability.
Sources: Economic Times, Moneycontrol, Fortune India
