The State Bank of India, the largest bank in India by asset size, has now approached the Bank of India to facilitate an acquisition. SBI Chairman Challa Sreenivasulu Setty announced this initiative in an industry event, outlining a need to change some regulations to cater to the corporate expansion efforts. The RBI policies do not allow banks to directly finance acquisition deals, and this aspect has forced companies to rely on non-banking finance institutions or issue bonds to raise capital.
Regulatory barriers: There are restrictions on the role of banks in M&A financing currently
Indian banks are not allowed to give loans with regard to mergers and acquisitions as per the existing regulations of the RBI, putting forth immense restrictions on the ventures that require expansion capital. This restriction, Zee News reports, makes the firms resort to non-banking finance companies or bond issuances when they intend to take over other businesses, which usually results in extra finance cost and complicated finance structures.
The point made by Mathrubhumi is that SBI is keen that the RBI should authorise acquisitions of funding at least in the earlier years of the large listed companies. This selective approach implies that it would have a slow-down approach, which would introduce it to several established corporations before possibly broadening it to smaller businesses.
The alternative financing poses problems for companies
The existing regulatory framework has ensured that companies resort to alternative sources of funds to fund their acquisitions, and these sources offer higher interest rates and less favorable terms as compared to normal bank loans. Non-banking financial institutions tend to offer high interest rates on acquisition finance, and bond issues also need substantial documentation support and favourable market conditions that are not always amenable to corporate expansionist plans.
Robust performance of banking sectors: Evidence of financial strength by the PSBs
The demand by SBI curves at a time when the nationwide performance of banks in India was outstanding as well. The 12 state-owned banks recorded an 11 per cent advance in net profit at 44,218 crore in the first quarter of the year 2025-26, as compared to the corresponding period the previous year.
SBI alone contributed this whole profit, or 43 percent of the total profit, as it had earned net earnings of 19160 crore, which showed an increase of 12 percent over Q1 FY25. This good financial performance reveals the potential of the banking industry to absorb more lending operations, such as acquisition financing.
How capital strengthening aids lending growth
The PSU banks had also mobilised around 1.54 lakh crore between the three fiscals up till FY25 through equity and debt securities in the form of bonds to strengthen their position. their capital base with a view to supporting credit growth. This capital reinforcement enables banks to be capable of accommodating larger volumes of loans, yet at the same time maintain compliance with the regulatory authorities and quality control of risks.
Checkpoints on the strategy: The push and pull it could have on the M&A market volume
Should the RBI accept the request of SBI, it would open up a major source of funding to the Indian businesses to grow through acquisitions. The supply of bank financing when it comes to M&A activities would tend to lower the costs involved in acquiring companies and possibly lead to an increase in levels of merger and acquisition activity in the Indian market.
The request by SBI to the RBI includes a significant potential paradigm shift in India, where sound financial performance has placed the lenders in a position to finance increased corporate activities. The proposal to introduce acquisition financing, initially to the largest-listed companies, expresses confidence on the part of the banking sector that it can sustain this extra risk lending to fuel economic growth.