India’s private credit market could face pressure after the Reserve Bank of India (RBI) allowed banks to finance a larger share of corporate acquisitions, according to Moody’s Ratings. The agency said the move may reduce returns for private credit funds by increasing competition in one of their most profitable segments - acquisition financing.
Key Highlights
- Moody’s warns RBI's acquisition financing rules may reduce private credit returns by increasing competition from banks.
- Banks can now fund up to 75% of takeover value, boosting India's growing M&A financing market.
Banks May Challenge Private Credit Funds in M&A Financing
Under the new RBI framework, banks can finance up to 75% of the value of a corporate takeover, a change expected to support India’s growing mergers and acquisitions market, which is estimated to be worth more than $40 billion.
Moody’s said the policy is likely to benefit borrowers by lowering financing costs and improving access to funding. However, it could also compress yields and reduce deal opportunities for private credit providers, which have traditionally earned higher returns through customised “special situations” financing for acquisitions.
Private credit funds have often catered to companies that required flexible funding structures and were willing to pay a premium over conventional bank loans. With banks now entering the space more aggressively, those premium returns may become harder to sustain.
Large Indian Banks Expand M&A Financing Partnerships
Major lenders are already positioning themselves to capture acquisition financing opportunities.
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State Bank of India has partnered with Mitsubishi UFJ Financial Group to jointly pursue M&A financing deals.
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SBI is also expected to join a consortium of global lenders supporting Sun Pharmaceutical Industries’ proposed $12 billion overseas acquisition.
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Bank of Baroda has entered a partnership with Mizuho Bank to finance mergers and acquisitions
Also Read: Banking Liquidity Deficit Hits Rs 19,971 Cr; RBI Injects Rs 1.41 Trn
India’s Private Credit Industry Continues to Grow
Despite the potential competition from banks, Moody’s expects India’s private credit market to continue expanding. Assets under management in the sector have doubled over the past five years to about $25 billion, while annual transaction volumes have crossed $11 billion.
Growth is being driven by financing demand from infrastructure projects, real estate developers, and founder-led refinancing transactions. Real estate accounts for roughly 40% of the market by value, followed by infrastructure and utilities.
Moody’s flags rising risks for investors
The ratings agency warned that investors in private credit may face higher risks as the market matures. Key concerns include:
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Increasing leverage levels
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Opaque financing structures
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Valuation challenges
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Potential liquidity shortages
Moody’s Rating highlighted major transactions such as Shapoorji Pallonji Group’s Rs 286 billion financing deal and Mumbai International Airport’s $750 million refinancing with Apollo-led global investors as examples of the sector’s growing scale.
Outlook
The RBI’s decision marks a significant shift in India’s acquisition financing landscape. While companies seeking takeover funding may benefit from cheaper and more readily available bank credit, private credit funds could face tighter margins and stronger competition from traditional lenders in the years ahead.
