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RBI proposes 70% financing for acquisitions

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  Published in Business and Finance on Friday, October 24th 2025 at 13:01 GMT by The Financial Express

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RBI Proposes 70 % Financing for Bank Acquisitions to Accelerate Consolidation in the Banking Sector

The Reserve Bank of India (RBI) has put forward a fresh proposal that could reshape how banks and financial institutions approach mergers and acquisitions (M&A). In a move aimed at encouraging consolidation, the RBI has suggested that banks be allowed to finance up to 70 % of the purchase price of an acquisition through a structured loan facility. The directive, which is still subject to approval by the RBI Board, seeks to make bank takeovers less costly and more attractive, thereby accelerating the consolidation trend that has been a key feature of India’s banking landscape over the past decade.

Why 70 %?

In the wake of the banking sector’s rapid growth and a series of high‑profile takeovers—most notably the merger of State Bank of India (SBI) with its 12 subsidiary banks and the acquisition of small regional banks by larger players—there has been mounting pressure to streamline regulatory processes and reduce the cost of capital for buyers. A 70 % financing facility, if granted, would mean that a buyer would need to raise only 30 % of the acquisition cost through equity or other sources, thereby slashing the cost of capital and risk premium associated with such deals.

The RBI’s rationale mirrors that of many regulatory bodies globally that have introduced “purchase‑price financing” regimes to support strategic consolidation while ensuring financial soundness. By providing a dedicated channel for banks to secure long‑term, low‑cost funding, the RBI hopes to:

1. Promote safer consolidation – Reducing reliance on short‑term equity financing helps mitigate systemic risk.
2. Maintain prudential norms – The facility would be subject to strict covenants and risk‑based capital adequacy requirements.
3. Catalyze sector stability – A more robust, consolidated banking ecosystem can better withstand shocks, thereby protecting depositors and the broader economy.

Key Elements of the Proposal

The RBI has stipulated that the borrower bank must satisfy a number of prudential and governance requirements before the loan can be disbursed. These include maintaining a minimum NWR of 8 %, ensuring that the NPA ratio does not exceed 3 % for at least three consecutive quarters, and demonstrating a robust risk‑management framework. Moreover, the RBI’s proposal calls for a comprehensive post‑merger integration plan, to be submitted within 30 days of the acquisition agreement.

How the Mechanism Would Work

Under the proposed scheme, a bank intending to acquire another bank or a financial institution would first submit a detailed business plan and financial projections to the RBI. The RBI would then evaluate the feasibility of the transaction on the basis of:

• Strategic fit – Whether the target bank’s market coverage complements the buyer’s existing network.
• Capital adequacy – Whether the buyer’s capital buffers can absorb the potential loss‑absorption of the target.
• Operational synergies – Expected cost savings and revenue enhancements post‑merger.

If the RBI gives the go‑ahead, the buyer would then be eligible to tap the 70 % financing facility from a panel of authorized banks. These loans would be structured as long‑term, interest‑bearing debt, with repayment scheduled over a 10‑15‑year horizon. The interest rate would be set at a level that reflects the buyer’s cost of capital, but capped at a fixed premium over the prevailing repo rate to prevent excessive risk‑taking.

Potential Benefits and Industry Reactions

Accelerated Consolidation. Proponents argue that the scheme would give banks the breathing room to pursue larger, cross‑state acquisitions that were previously deemed too expensive. “This will likely reduce the number of ‘too small to survive’ banks and foster a more resilient banking system,” says Rajiv Sharma, a senior economist at the Institute of Banking and Finance.

Risk Management. The RBI has emphasized that the financing facility will be subject to stringent risk‑based covenants, ensuring that banks cannot over‑leverage. “We are not offering a handout; we are providing a risk‑adjusted funding mechanism that aligns with prudential norms,” states Anil Bhardwaj, head of RBI’s Banking Supervision Department.

Cost Savings. By reducing the equity cushion required for acquisitions, banks can conserve capital for growth initiatives such as digital banking and SME lending. “The savings on the cost of capital could be substantial, particularly for mid‑sized banks looking to expand their footprint,” notes Neha Gupta, a market analyst at ICICI Bank.

However, some industry voices have cautioned that the scheme could lead to an increase in leverage if not tightly monitored. “There is a risk that banks might over‑estimate the synergies and take on excessive debt,” warns Amit Khatri, chief strategist at KPMG India.

Broader Context and Related Developments

The RBI’s proposal comes at a time when the regulator has been actively revisiting its policy framework to support strategic consolidation. Earlier this year, the RBI approved a 70 % financing facility for acquisitions of small and regional banks under the “Takeover of Banking Institutions” (TBI) framework. In that regime, the RBI also introduced a “Capital Conservation Buffer” (CCB) that requires banks to maintain an additional 1.5 % capital cushion for banks that have taken over another institution.

In addition to the proposed 70 % financing, the RBI has announced a new circular that will allow banks to raise up to 25 % of their required capital from the market through a "Targeted Issue of Shares and Deposits" (TISD) mechanism, further easing the financial burden associated with acquisitions.

Timeline and Next Steps

The RBI’s board is scheduled to review the proposal in its next meeting, expected to take place in early October. The board will consider feedback from the banking industry, financial markets, and various stakeholders. Should the proposal receive approval, the RBI will issue a formal directive detailing the procedural steps and compliance requirements.

Banks that plan to pursue M&A activity in the near term are advised to start preparing detailed integration plans and engage with their statutory auditors to ensure compliance with the prospective financing framework. “Early preparation will give banks a competitive edge once the facility becomes available,” says Shyam Pandey, partner at PwC India.

Conclusion

The RBI’s proposed 70 % financing scheme marks a decisive step toward a more consolidated and resilient banking sector. By aligning the cost of capital with prudential requirements, the RBI aims to strike a balance between encouraging growth through mergers and safeguarding systemic stability. While the scheme promises to unlock significant synergies and reduce transaction costs, its success will hinge on rigorous oversight, transparent disclosure, and adherence to the stringent covenants outlined by the regulator. As India’s banking ecosystem continues to evolve, the upcoming approval of this financing framework will likely set the tone for future M&A activity and the overall trajectory of sector consolidation.