Will RBI’s push for bank-funded acquisitions turn private credit’s feast into famine?

The Reserve Bank of India, as part of its Statement on Developmental and Regulatory Policies released alongside the monetary policy statement on October 1 proposed allowing banks to fund corporate buyouts.

At a broader level, the RBI’s proposal is “very proactive and progressive” and is expected to go a long way in reducing the cost and enhancing availability of capital pools for individuals and corporates, said Bhavdeep Bhatt, chief executive officer of Northern Arc Investments.

Private credit growth has been strong in 2025. Total private credit deployment touched $9 billion across 79 deals in the first half of calendar 2025—a 53% jump from the first half of 2024 and close to three times the value for the latter half of 2024, a report by EY in August noted. The biggest of deals was the $3.1 billion raised by Porteast Investment of the Shapoorji Pallonji Group—the biggest onshore private credit transaction in India to date.

Indian private credit players include Kotak Alternative Asset Management, 360 One, Avendus Capital, and Edelweiss Funds, among others; international players include Blackrock, Blackstone, KKR, Abudhabi Investment Authority, and several others.

A key factor for the growth of the private credit market in India until now has been the RBI’s restrictions on banks providing acquisition finance, said Geeta Chugh, managing director, sector lead, financial services ratings at S&P Global Ratings.

Longer term impact

The proposed entry of banks, with their relatively larger balance sheets and readiness to lend amid muted corporate growth, could potentially result in lower yields, looser terms, and weaker collateral structures. In some cases, enforcing collateral or ensuring debt coverage may be weaker than with traditional bank loans, other experts told Mint.

Still, in the short to medium term, the overall impact on private credit funds is expected to be small, given the limited ability and skill sets of banks to fund complex deals and the flexibility at private credit firms on with customisations and value-addition.

Private credit funds command superior returns because they offer customised funding structures—tailored for complexity, risk, scale and quick turnarounds. Bound by tight regulations, banks often lack flexibility and are likely to be limited to larger, simpler, and less risky transactions, said Ashwin Patni, head, wealth management services, Julius Baer. Most takers for private credit deals are mid-market corporates who require a nimble approach.

“Acquisition financing is just a small slice of the private credit pie, so any minor capital shift toward banks will not impact the broader opportunity set,” said Patni. But, the crucial difference could be in how deals are structured with the entry of banks.

Cost of funding

Banks with their lower cost of funds will have the advantage of lower pricing, something that private credit funds cannot compete with, experts said, adding that the latter will also then have to look at what value proposition they offer clients.

Private credit currently prices at 14-17% IRR, and if banks are permitted to finance acquisitions, they could come in at a materially lower cost—around 10–12% all-in, given their access to low-cost deposits, said Atul Thakkar, executive director, Anand Rathi Investment Banking.

Raghunath T, senior portfolio manager at Vivriti Asset Management, believes that this pricing dynamic is sustainable given that investor allocations to private credit have grown regardless of rate or liquidity considerations and driven by consistent outperformance compared to public debt markets.

What’s more is that the deal flow for private credit funds is diversified across sectors, he said, adding that typically, sectors with M&As and extraordinarily high growth seek credit solutions from private credit funds.

“Today, a lot of infrastructure platforms across renewable energy, transportation and high-growth segments like electronics manufacturing and logistics are contributing to a large share of the deal flow,” Raghunath said.

Red flags

Despite the proposed RBI norms expected to open up capital for acquisition financing, some market participants remain sceptical and warn that this comes with a higher risk of bank exposure to certain corporates.

While bank loans would likely carry tighter covenants and security packages compared to private credit, the only risk factor is the need for the central bank to set an overall limit on how much exposure each bank can take on in the private credit segment, said Thakkar of Anand Rathi Investment Banking.

Others worry that if banks are allowed to finance acquisitions, it could lead to indirect promoter funding through backdoor loans, and without clear rules, acquisition finance might be misused. Regulators would likely require strict monitoring to ensure funds are not for equity buybacks or share pledges.

“The systemic risk is limited right now because private credit is still a small slice compared to total bank lending,” said Vishal Bansal, partner, debt and special situations, EY India. Risks such as asset quality deterioration could emerge if funds loosen standards to win deals or liquidity mismatches crop up if investors want to exit before loans mature, he cautioned.