RBI’s new credit playbook

The timing of this credit reboot is deliberate. With capital markets maturing, infrastructure surging and consolidation accelerating, India needs deeper domestic capital to sustain its growth. The RBI’s reforms respond to these shifts, enabling banks to deliver more sophisticated, higher-risk credit where it’s needed.

Stabilising non-banking financial company (NBFC) funding channels, along with clearer consumer‑credit classifications, has reduced funding stress and reopened bank lines to NBFCs, helping diversify credit flows across both retail and infrastructure sectors. A broader investor base is transforming India’s equity and debt markets. Greater liquidity and deeper participation enable more flexible capital formation, improving market resilience and capacity to support corporate innovation.

Historically, Indian leveraged buyouts depended heavily on offshore lenders, NBFCs, or private credit funds due to RBI restrictions. By opening the door for banks to fund acquisitions and easing lending against listed debt, the RBI is rerouting deal financing into the regulated banking system.

India’s merger and acquisitions (M&A) market is expanding rapidly, mainly driven by a maturing capital market, sector consolidation and stronger investor confidence.

The financing strategy is the principal lever in M&As. One of the funding options is listed equity, where acquirers use their own shares for consideration. This preserves cash and provides tax efficiency but introduces dilution risk and greater exposure to valuation fluctuations while requiring adherence to the Securities and Exchange Board of India (Sebi) norms. The other is assuming the seller’s existing debt, commonly used in distressed deals, which enables acquirers to preserve equity and benefit from tax-deductible interest. However, this method demands rigorous diligence to uncover hidden liabilities and ensure compliance with RBI and Foreign Exchange Management Act (FEMA) guidelines.

Other methods include high-yield debt, including private credit, mezzanine financing, and non-convertible debentures. These have expanded rapidly, driven by attractive returns, earlier banking constraints, stronger creditor rights under the Insolvency and Bankruptcy Code, and favourable tax changes. These instruments provide flexible, non-dilutive capital, though at the expense of higher costs and more stringent compliance requirements

In leveraged buyouts, a significant share of the purchase value is financed using debt, secured against the target’s assets and cash flows. This structure allows large acquisitions with limited equity and provides tax benefits but increases financial risk and demands stronger post-acquisition governance.

In cash and earnout structures, a portion of the consideration is paid upfront, and the remainder is tied to performance milestones. This helps bridge valuation gaps but requires sufficient liquidity for upfront cash payment. These funding channels demand disciplined underwriting, realistic synergy modelling and calibrated leverage to avoid cash‑flow stress in a volatile market environment.

Regulatory easing on high‑risk assets demands robust bank frameworks, strategic partnerships and compliant, risk‑sharing structures for efficient capital deployment. Through syndicated lending, Indian banks can co-lend with international banks as mandated lead arrangers (MLAs) or security trustees, using market flex and Loan Market Association (LMA) transfer mechanics to optimise pricing/allocation, diversify risk and stay within exposure caps.

Banks could leverage external commercial borrowing (ECB) and International Financial Services Centre (IFSC) banking units to access cost-efficient foreign currency tranches for the acquisition of cross-border funding channels.

The new rules unlock opportunity, with the lenders having an edge with syndication savvy, real-time risk operations and cash flow discipline. Deal underwriting and syndication skills include building robust LBOs/M&A models (capturing synergies and integration risk), planning bridge to bond exits, mapping investors and documentation, plus obtaining sound cross-border legal opinions when deals involve offshore legs.

In live markets, securities-backed lending or loan against shares demands daily mark-to-market discipline, intraday margining, precise haircut calibration, vigilant corporate actions monitoring and clear gap down playbooks for volatility shocks. On the cash flow side, real estate investment trust (REIT)/infrastructure investment trusts (InvIT) lending hinges on reading trust deeds, validating waterfalls, setting and monitoring debt service coverage ratio/debt service reserve account covenants, supervising valuations and planning capex reserves to protect distributions.

At the core of these are Basel-grade analytics and the Internal Capital Adequacy Assessment Process (ICAAP). Banks compute ratings while applying credit conversion factors to off-balance sheet exposures.

The move towards liberalisation creates new opportunities but also brings in new challenges. Key strategies to manage these include: maintaining strict adherence to regulatory norms and strengthening governance frameworks for all risk-taking activities. It is also crucial to conduct thorough evaluations to quantify risks in high-risk investments, including borrower profiles, sectoral exposure, and deal structures, before committing capital. Structured financing instruments could be leveraged to reduce exposure and safeguard against potential defaults.

Implementing real-time monitoring systems and conducting periodic reviews could address emerging vulnerabilities promptly. Banks could deploy continuous controls monitoring systems to transform their risk management through proactive intelligence.