Indian banks push RBI to double lending cap for mergers as deal activity heats up

India’s lenders are lobbying the central bank to relax strict financing limits on mergers and acquisitions, seeking greater flexibility to capture a larger slice of the country’s $69 billion dealmaking market currently dominated by foreign rivals.

According to people familiar with the discussions, the Indian Banks’ Association (IBA)—representing major lenders including the State Bank of India (SBI)—has formally urged the Reserve Bank of India (RBI) to double the lending cap for acquisition financing.

Currently, domestic banks can lend only up to 10% of their Tier 1 (core) capital for M&A activity. The industry is pushing to raise this ceiling to at least 20%, arguing that the existing threshold leaves them unable to underwrite the large-ticket transactions that characterize India’s maturing corporate landscape.

Leveling the Playing Field

The push follows a landmark policy shift in October, when the RBI introduced an enabling framework (via draft directions on Oct 24) allowing domestic banks to directly finance strategic buyouts—a practice previously restricted due to concerns over asset bubbles.

However, bankers argue that without a higher capital cap, the regulatory opening is theoretical rather than practical. Under current norms, Indian conglomerates frequently turn to multinational giants like Citigroup, Barclays, and JPMorgan for funding, or bypass banks entirely to raise capital via bond markets.

“The appetite is there, but the regulatory handcuffs remain,” said a senior executive at a state-run bank. “We are seeing healthy corporate balance sheets and a deleveraging cycle that supports M&A, yet we are forced to sit out the biggest deals because of the 10% cap.”

Deal Activity Accelerates

The request comes as corporate India aggressively pursues consolidation and expansion. Announced mergers and acquisitions have touched $69 billion year-to-date in 2025, an 18% increase from the same period last year, according to Bloomberg data.

The surge is driven by strong domestic consumption and robust corporate earnings. If the RBI approves the proposal, it would significantly deepen India’s onshore financial ecosystem, reducing the reliance of top-tier Indian firms on offshore funding markets.

Regulatory Caution Remains

While the RBI is reviewing the industry feedback, approval is not guaranteed. The regulator has historically been conservative regarding acquisition financing, viewing it as a higher-risk category that can lead to aggressive leverage and bad loans if unchecked.

Brief Summary

Indian banks have asked the RBI to raise the cap on merger financing from 10% to 20% of core capital. The move aims to help domestic lenders compete with global banks for India’s booming M&A market, which has hit $69 billion in 2025. This follows the RBI’s October decision to allow domestic banks to fund acquisitions, though the industry argues the current capital limits are too restrictive to make the policy effective.

Frequently Asked Questions (FAQs)

Q1: What are Indian banks asking for? 

A: The Indian Banks’ Association (IBA) has asked the RBI to increase the limit on how much money banks can lend for Mergers and Acquisitions (M&A) from 10% of their Tier 1 capital to 20%.

Q2: Why do they want this change? 

Indian banks feel handicapped against foreign competitors. Global banks (like Citi or JPMorgan) do not face the same strict caps, allowing them to fund massive corporate takeovers. Indian banks want to capture the fees and interest income from these lucrative deals.

Q3: What is the current state of India’s M&A market? 

It is booming. Deal volume has reached $69 billion so far in 2025, up 18% from last year. Companies are using strong profits and cleaner balance sheets to buy competitors and expand.

Q4: What changed in October? 

In October 2025, the RBI officially proposed allowing Indian banks to finance M&A deals, overturning years of restrictions. However, banks argue that while they are allowed to do it, the amount they can lend is still too low to be useful for big deals.

Q5: Will the RBI approve this? 

It is uncertain. The RBI is traditionally very cautious about allowing banks to fund stock purchases or takeovers because if a deal goes bad, it poses a high risk to the banking system.