Banks can now fund India Inc's M&A drive

Core Viewpoint - The Reserve Bank of India (RBI) has allowed banks to finance acquisitions by Indian companies, addressing a long-standing demand and expanding banks' capital market lending capabilities [1][3]. Group 1: Regulatory Changes - The RBI's decision aims to provide an enabling framework for Indian banks to finance acquisitions, particularly as corporate credit growth has slowed, leading companies to seek alternative funding sources [3][5]. - Historically, Indian banks have been restricted from lending for mergers and acquisitions (M&As) due to concerns over over-leverage and the potential lack of direct asset creation [5][13]. Group 2: Market Implications - The move is expected to shift acquisition financing back to banks from the private credit market, where borrowing costs are significantly higher [6]. - Banks are anticipated to focus on smaller acquisitions, particularly from micro, small, and medium enterprises (MSMEs), debt-free companies, and players in the pharmaceutical sector [7]. Group 3: Financial Projections - If 30% of the estimated 40% debt component of M&A deals is financed by banks, this could lead to a potential credit growth of ₹1.2 trillion [9]. - M&A deals in FY24 were valued at over $120 billion (₹10 trillion), indicating a substantial market for acquisition financing [8]. Group 4: Industry Response - The Indian Banks Association has formally requested the RBI to allow domestic banks to finance M&As, starting with listed companies for greater transparency [4]. - Experts believe that allowing acquisition financing will create business opportunities for banks and support strong Indian corporates in acquiring companies at attractive valuations [12].