Indian Banks Push for 20% M&A Financing Cap to Challenge Foreign Rivals

Indian banks are pushing to double the cap on merger financing from 10% to 20% of their core capital, aiming to capture a larger share of the surging domestic deals market. The State Bank of India and other major lenders have proposed the change to the Reserve Bank of India, which recently allowed local banks to finance mergers and acquisitions for the first time. The move reflects growing appetite for deals, driven by stronger corporate balance sheets and improved access to capital.

With foreign banks traditionally dominating M&A financing, Indian lenders see an opportunity to compete more effectively. The RBI has yet to finalize the proposal but is expected to release updated guidelines after collecting feedback from the sector. Analysts note that the current 10% cap has limited domestic banks' ability to finance large transactions, leaving the field open for global players.

The Indian Banks' Association has formally requested the cap adjustment on behalf of member banks. However, regulatory approval remains uncertain. The RBI, SBI, and the IBA have not responded to requests for comment according to the report.

Why the Standoff Happened

The cap on M&A financing was originally imposed due to regulatory and asset-quality concerns, which led to a reliance on foreign lenders and public markets for deal funding. Unlike domestic institutions, global banks are not bound by the 10% Tier 1 capital rule, giving them a competitive edge in India's growing M&A market. This has limited local banks' ability to generate revenue from high-margin corporate finance deals.

Indian banks argue that raising the cap would allow them to better serve domestic clients and expand their market share. The RBI's recent decision to permit local banks to enter the M&A financing arena marks a significant shift in policy. However, the regulatory body has emphasized the need to balance growth with financial stability, which could delay the approval of the 20% proposal.

Risks to the Outlook

The potential increase in M&A financing exposure raises concerns about the risk profiles of Indian banks. Lenders will need to ensure that such financing does not undermine their asset quality or liquidity. Regulators will likely monitor the impact of any new lending norms closely, particularly in light of recent tightening in the P2P lending sector and the need for continued stability in the banking system according to recent reports.

Moreover, the success of the proposal depends on the overall health of the M&A market. While activity has surged, with announced deals reaching $69 billion in 2025, there is still uncertainty about the sustainability of the trend. Macroeconomic factors, such as inflation and interest rates, could influence the pace of dealmaking in the coming months.

What This Means for Investors

Investors are watching closely as banks position themselves for a larger role in M&A financing. A higher cap could boost earnings for domestic lenders by opening up a new revenue stream. However, the move also exposes them to potential credit and liquidity risks if the deals fail or if market conditions shift. For now, the focus remains on how the RBI will balance growth with prudential oversight.

In the broader market, the push for higher merger financing limits aligns with a global trend of increased M&A activity. Companies are rushing to lock in low borrowing costs and execute strategic deals before potential economic shifts in 2026. This environment benefits not only banks but also asset managers and private equity firms seeking to capitalize on the momentum.