Reserve Bank of India Implements New Financing Rules Amid Liquidity Challenges

The Reserve Bank of India (RBI) has announced a significant policy change allowing lenders to finance up to 75% of the acquisition value in corporate takeovers. This decision, made public on February 13, 2026, is expected to invigorate India's mergers and acquisitions (M&A) market, which is valued at over US$40 billion. However, financing is contingent upon the acquiring firm already holding control over the target company. Additionally, acquirers must contribute the remaining amount through fresh equity or internal funds. The RBI's new rules permit banks to fund companies acquiring more than a 26% stake, a shift from previous regulations that restricted direct financing due to asset-quality concerns.

India central bank allows lenders to fund up to 75% in M&A dealsTaipei TimesIndia Banks Face Funding Squeeze as Credit Outpaces Deposits

Simultaneously, Indian banks are facing a tightening of liquidity as credit growth has consistently outpaced deposit mobilization. By January 2026, the incremental credit-deposit ratio reached nearly 97%, a significant rise from the overall ratio of 82.3%. This imbalance has compelled banks to rely more on costlier wholesale funding, with outstanding Certificates of Deposit (CDs) reaching approximately Rs 5.3-5.4 trillion. The RBI's measures to support liquidity have not alleviated the pressure on banks, as rising CD rates—now exceeding 7%—indicate increasing funding costs.

India Banks Face Funding Squeeze as Credit Outpaces Deposits

The RBI's new financing rules come at a time when banks are grappling with the challenges of maintaining profitability amid rising costs. Major banks like State Bank of India (SBI) and ICICI Bank have revised their credit growth forecasts upwards, driven by strong demand across retail and corporate segments. However, the reliance on household savings rather than surplus central bank liquidity raises concerns about the sustainability of this credit expansion. Analysts warn that if banks cannot effectively manage their funding costs, they may face compression in Net Interest Margins (NIMs), impacting overall profitability.

India Banks Face Funding Squeeze as Credit Outpaces Deposits

Critics of the RBI's approach argue that while the new financing guidelines may stimulate M&A activity, they do not address the underlying liquidity issues facing banks. The tightening of rules for loans to brokers and proprietary trading firms is seen as an additional burden that could further strain trading volumes and market activity. The RBI's focus on reducing speculative trading may inadvertently hinder the growth potential of financial markets, as firms face increased costs and regulatory hurdles.

Taipei TimesIndia Banks Face Funding Squeeze as Credit Outpaces Deposits

The RBI has emphasized that its liquidity measures aim to support monetary policy transmission while addressing the need for banks to balance aggressive credit targets with effective deposit mobilization. The central bank has assured ongoing liquidity support, but the banking sector's outlook remains cautiously optimistic. With projected GDP growth of 6.4% for FY26-27 and the recent India-US trade deal, the ability of banks to navigate funding challenges will be critical for sustaining credit growth and maintaining asset quality.

India Banks Face Funding Squeeze as Credit Outpaces Deposits

• “Financing can only take place when a firm “already holds control” over the target company, the Reserve Bank of India (RBI) announced on Friday (Feb 13).” — Reserve Bank of India

India central bank allows lenders to fund up to 75% in M&A deals

This evolving landscape of banking regulations and liquidity challenges will shape the future of India's financial sector, as stakeholders adapt to new realities in funding and investment strategies.

India Banks Face Funding Squeeze as Credit Outpaces Deposits