India's central bank, the Reserve Bank of India (RBI), has announced a significant policy shift, proposing a framework to allow domestic banks to directly finance mergers and acquisitions (M&A) by Indian corporates. This move is anticipated to invigorate the country's over $40 billion deals market and has been a long-standing demand from the Indian banking sector, as highlighted by State Bank of India Chairman C.S. Setty.

Previously, local lenders were largely barred from directly funding corporate takeovers due to regulatory and asset-quality concerns, leading corporates to rely on non-banking financial companies (NBFCs), foreign lenders, or public and private markets. RBI Governor Sanjay Malhotra emphasized that the proposed relaxation aims to promote stability while simultaneously improving competitiveness, encouraging, and enhancing the economy's growth. This comes at a time of rising corporate M&A appetite in India, driven by healthier balance sheets, years of debt reduction, and strong domestic demand, with domestic M&A volumes reaching nearly $41 billion in 2025.

Alongside the M&A financing liberalization, the RBI unveiled a suite of 22 measures designed to boost bank lending and enhance capital market activity. Key changes include the removal of regulatory ceilings on lending against listed debt securities. Furthermore, the limits for bank lending against equity shares for individuals will be substantially increased from ₹20 lakh ($22,554) to ₹1 crore ($225,540), and for IPO financing, the cap will be raised from ₹10 lakh to ₹25 lakh per person. These decisions mark a crucial step in deepening the role of banks in the capital market, as noted by Anil Gupta, senior vice president at rating agency ICRA.

Other pivotal regulatory reforms announced include the withdrawal of a 2016 framework that disincentivized lending by banks to specified large borrowers (with credit limits of ₹10,000 crore and above). This change will enable banks to increase lending to big companies, with the RBI stating that concentration risk at the banking system level will be managed through specific macroprudential tools. Additionally, to reduce the cost of infrastructure financing, the RBI proposed lowering the risk weights applicable to lending by NBFCs to operational, high-quality infrastructure projects. The central bank also announced plans to publish a discussion paper on the licensing of new Urban Co-operative Banks (UCBs), considering positive developments in the sector since licensing was paused in 2004.

In terms of capital rules and risk management, Governor Malhotra detailed the implementation timeline for the Expected Credit Loss (ECL) framework. Lenders are proposed to apply the ECL method, which requires provisioning based on the probability of default upfront, from April 1, 2027, with a five-year glide path for full implementation until March 31, 2031. The central bank also stated that final guidelines would drop proposed limits on business overlaps between banks and their group entities, granting boards greater freedom in strategic allocations. Moreover, Basel 3 norms are slated to become effective for banks from April 1, 2027, and draft rules for credit risk are expected to follow shortly, aiming to lower risk weights on certain segments like small enterprises and residential real estate, including home loans.

The market reacted positively to these announcements, with the Nifty Bank index climbing 1.4% and the Nifty private bank index rising 1.97%. Analysts like Bharat Gupta of Au-RRange Ventures anticipate that if state-run banks are allowed to fund high-rated M&A deals, they will likely take market share from foreign banks that have historically benefited from this regulatory arbitrage. While these measures are expected to foster credit growth in the long run, near-term growth may still be constrained by demand. The RBI's comprehensive package underscores its commitment to fostering financial stability while adapting regulations to meet the economy's productive needs and growth aspirations.