Should Banks Finance Mergers and Acquisitions in India?, ETBFSI

What are the pros and cons of allowing banks to fund M&As?
India’s largest lender, State Bank of India, has formally urged the Reserve Bank of India to allow banks to finance mergers and acquisitions, a shift that could reshape corporate financing and bring the sector in line with international practices. Currently, banks are barred from lending for acquisitions, leaving companies dependent on non-banking financial firms or raising capital through the bond market.

Proponents argue that lifting this restriction would give Indian companies access to cheaper and more reliable financing, boosting domestic deal-making and reducing dependence on costlier non-bank options. With balance sheets of large public sector banks stronger than before, supporters see a chance to channel this capital into strategic corporate consolidation, especially in sectors where scale is critical. Enabling banks to finance acquisitions is also viewed as a way to modernize financial regulations and address a longstanding competitive disadvantage faced by Indian firms compared to global rivals that can access bank-backed M&A loans in their home markets.
The call for change comes against a historical backdrop. Restrictions on bank financing of acquisitions were imposed after episodes of misuse of funds in the early 1990s, when speculative practices highlighted the lack of banking sector capacity to handle complex financing. Since then, the financial system has matured considerably, and regulatory oversight has grown stronger. With corporations deleveraging in recent years and turning back to markets for funding, the question is whether India’s regulatory regime should evolve in step with changing conditions.

Big concerns

However, concerns remain significant. Acquisition lending carries inherent risks, with the success of such transactions often hinging on integration, synergies, and future profitability. Previous experiences with large mergers, including those in India’s own banking sector, have shown that returns can fall short, putting pressure on capital adequacy and asset quality. There is also the danger of larger banks dominating the financing space, crowding out smaller lenders and raising the risk of market concentration. Critics warn that unchecked lending to M&A transactions could leave banks exposed in downturns and potentially recreate vulnerabilities reminiscent of past financial crises.
If the central bank takes up the proposal, it is expected that permission would initially be limited to listed companies to ensure shareholder transparency and stronger governance. The challenge will be to weigh the benefits of lower-cost domestic financing and greater competitiveness for Indian firms against the risks of overstretched bank balance sheets and potential systemic instability.At stake is not only the future of corporate consolidation in India but also the balance between growth and prudence in the country’s financial system. The decision on whether to permit banks to finance acquisitions will mark a turning point in how India’s economy manages expansion, risk, and regulatory safeguards.

• Published On Aug 28, 2025 at 08:00 AM IST

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