India’s mergers and acquisitions (M&A) landscape is expanding at a record pace. In 2025, deal activity is expected to cross $125 billion (Rs 11 trillion), driven by consolidation in financial services, manufacturing, renewables, and healthcare.
For many, the limiting factor has rarely been ambition. It is access to the right form of capital. Till date, equity or private credit have been a significant source of domestic M&A funding. This has been one of the reasons for the rapid growth in India’s private credit market in recent years.
The Reserve Bank of India’s recent draft directions open a new avenue for funding acquisitions, redrawing the boundary between traditional bank lending and the rapidly growing private credit universe.
A regulatory turning point
Till now, Indian banks were largely absent from acquisition financing, as prudential norms effectively discouraged lending for share purchases. Buyers were dependent on offshore debt, NBFCs, or private-credit funds.
The RBI’s new draft circular proposes to allow banks to fund up to 70% of an acquisition’s value, subject to strict eligibility criteria such as a profitable, listed acquirer and exposure caps of 10% of Tier-1 capital for such loans.
This is a cautious liberalization, but it acknowledges that inorganic growth has become central to Indian companies’ evolution and helps well-capitalized banks to build capabilities to prudently finance it before opening doors aggressively.
The proposed change, if implemented, will open one more avenue of financing besides private-credit funds. Each of the options serves a different need and risk appetite.
Why private credit will continue to thrive
With roughly $25 billion in assets under management, private credit in India was born out of necessity. It remains the most responsive option where deal structures are complex or timelines are compressed. The strength lies in its ability to design solutions that fit the transaction rather than force the transaction to fit regulatory templates.
Private-credit funds can fund leveraged buyouts, recapitalizations, or shareholder-level stake consolidations, often combining senior and mezzanine risk in a single instrument. They have higher leverage tolerance and are willing to underwrite on the cash flow, which makes them a viable funding avenue, especially for asset-light businesses that may not have collateral or unused bank limits.
Speed is another differentiator. With lean decision-making and investor capital already committed, private-credit funds can close deals in weeks, a critical advantage when acquisition windows are narrow. For India’s vibrant mid-market, companies with strong business models but limited rating history, this makes them the go-to partner.
Where banks will retain their edge
Once permitted by the RBI, banks can bring the advantages of price and permanence. They can be very competitively priced vis-à-vis private credit funds, which could have a major impact on the viability of the acquisition.
Banks could be a go-to funding option, especially for highly rated or large corporates with substantial asset bases, as they would have established banking relationships or unutilized credit lines.
Bank participation also ensures continuity after the deal: working-capital facilities, trade finance, and integration loans can be extended seamlessly within the same relationship.
The trade-off is flexibility. Regulatory caps, collateral requirements, and committee-based approvals make banks better suited to simple, often asset-backed transactions rather than highly structured or leveraged ones. As such, they will dominate the senior, low-risk end of the acquisition finance spectrum.
An evolving partnership
While mid-size organizations/M&As will continue to be largely funded by private credit funds, what is emerging is not competition but complementarity. Future M&A financings are likely to blend both sources: banks providing the low-cost senior layer, and private-credit funds contributing structured or subordinated tranches.
This arrangement spreads risk more evenly, reduces the weighted average cost of capital, and shortens execution timelines.
For mid-market or asset-light acquirers, this partnership could be transformational. A bank loan might anchor 60-70% of funding at a low rate, while private credit supplies the balance at a premium that could be quasi-equity.
For banks, co-lending enhances balance-sheet efficiency; for funds, it expands access to larger, higher-quality transactions; for borrowers, it offers the best of both worlds: cost discipline and structuring flexibility.
Looking ahead
The RBI’s draft norms are not just a regulatory relaxation, but a signal of confidence in the maturity of India’s financial system in general, and banks in particular. Reforms such as the Insolvency and Bankruptcy Code and Special Situation Funds have institutionalized risk and recovery mechanisms. Allowing banks into acquisition financing is the next logical step.
The next phase of India’s M&A financing will be defined by partnership, not polarity. Banks will serve the large, rated, asset-rich end of the market, while private credit will empower the entrepreneurial, mid-market, and asset-light segments who are reluctant to dilute or are unable to dilute equity.
Over time, mixed-funding structures will become standard practice: partial funding from banks at lower cost, supplemented by private credit carrying quasi-equity risk and returns.
Maulik Sanghavi is partner, corporate finance and investment banking at BDO India. Views are personal.
