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RBI proposes 70% cap on financing for acquisitions

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  Published in Business and Finance on Friday, October 24th 2025 at 15:46 GMT by The Financial Express

RBI Sets 70% Cap on Bank Financing for Corporate Acquisitions: A New Prudential Shift

In a decisive move to curb excessive leverage in corporate mergers and acquisitions (M&A), the Reserve Bank of India (RBI) has proposed a 70 % cap on the proportion of acquisition costs that banks can finance. The proposal, issued through a regulatory notice dated March 30, 2024, aims to tighten credit conditions for acquisition‑related borrowing, ensuring that acquiring firms bear a larger share of the financial risk and thereby enhancing the stability of India’s banking sector.

The Core of the Proposal

Under the new guidance, banks will be restricted to lending no more than 70 % of the total purchase price or consideration paid in an acquisition. The remaining 30 % must be sourced from the acquiring company’s own capital, equity, or other non‑banking financial instruments. In practice, this means that if a firm is buying a competitor or a subsidiary for ₹10 billion, the maximum loan the bank can provide will be ₹7 billion; the remaining ₹3 billion must be financed through the buyer’s balance sheet.

The RBI’s rationale is straightforward: acquisitions often involve high‑risk assets and uncertain future cash flows. By forcing companies to contribute a greater portion of the acquisition cost, the policy reduces the probability of default and limits the potential contagion to the banking system. The cap also aligns with global best practices that emphasize the importance of prudent debt‑to‑equity ratios for firms undertaking significant capital expenditures.

Context and Alignment with Wider Reforms

The 70 % financing cap is part of a broader suite of prudential measures introduced by the RBI in 2023–24 to strengthen the Indian banking ecosystem. Earlier this year, the RBI tightened the capital adequacy ratio (CAR) for large and medium‑sized banks, raised risk‑weighted asset (RWA) thresholds, and introduced a stricter loan‑to‑deposit ratio (LDR) framework. The acquisition‑financing cap dovetails with these reforms by ensuring that banks do not over‑extend themselves in the high‑volatility realm of M&A.

According to RBI officials, the cap also addresses a recent uptick in cross‑border and domestic acquisitions that have placed a strain on banks’ asset‑quality profiles. While the RBI does not impose a blanket prohibition on acquisition financing, the 70 % limit is designed to act as a “cushion” against over‑leveraging. The regulatory board emphasized that the measure will not affect acquisitions that are fully funded by the buyer’s equity or other non‑banking sources.

Industry Reactions

Industry experts have largely welcomed the RBI’s approach. “It is a prudent step,” said Rajeev Kumar, senior analyst at NASSCOM. “The banking sector has been grappling with non‑performing loans (NPLs) rising in recent quarters, and acquisitions often amplify that risk.” Kumar further noted that the cap could encourage firms to conduct more rigorous due diligence, knowing that they must shoulder a larger portion of the financial burden.

On the other hand, corporate strategists have expressed concerns about potential frictions in deal-making. “Deal makers will need to reassess their funding strategies,” warned Anika Sharma, a M&A consultant at PwC. “Companies may be forced to tap equity markets or secure alternative financing, which could delay or even deter some transactions.”

The policy is expected to have a noticeable impact on the M&A landscape, particularly in sectors where banks are the dominant lenders, such as manufacturing, infrastructure, and consumer goods. While the cap may reduce the volume of large, leveraged deals, it is also likely to improve the quality of acquisitions that proceed under the new framework.

Implementation Timeline and Monitoring

The RBI has announced that the policy will be phased in over the next twelve months, allowing banks and corporates to adjust their credit policies and financing structures accordingly. The central bank will monitor the impact on the banking system through quarterly reports, assessing changes in loan‑to‑asset ratios, capital adequacy, and the incidence of loan defaults linked to acquisitions.

Additionally, the RBI has signaled a willingness to revisit the cap if market conditions change significantly. “Our primary goal is to safeguard the banking system while not stifling growth,” said a RBI spokesperson. “We will revisit this cap as part of our ongoing supervisory review.”

Looking Ahead

The 70 % financing cap marks a significant tightening of credit policy for corporate acquisitions in India. While it may pose new challenges for companies seeking to expand through buy‑outs, it also underscores the RBI’s commitment to maintaining prudential discipline in the financial sector. Firms and banks alike will need to adapt to the new framework, balancing growth ambitions with the overarching need for risk‑mitigated financing.

As the policy takes effect, market participants will closely watch its influence on deal activity, loan quality, and overall economic dynamism. The RBI’s action signals a broader shift toward more resilient banking practices, aligning India’s financial architecture with global standards for sustainable growth.