Banks' entry to make M&A funding a hard bargain

MUMBAI: India's alternative credit market is due for a shake-up, with private credit funds, non-bank lenders and even local arms of foreign banks that hitherto dominated big-ticket secondary-market M&As, such as the JSW Paints-Akzo Nobel buyout, facing a collective loss in their bargaining power after the central bank Wednesday allowed mainstream lenders to finance takeovers via share transfers.

For years, banks were barred from financing mergers and acquisitions through equity purchases, curbs that were put in place to prevent leverage buyouts. While banks could lend against hard assets such as plants, brands, and factories, they were not permitted to fund share purchases that gave acquirers control of firms.

That gap was filled by alternative investment funds, NBFCs, mutual funds and foreign lenders operating through offshore vehicles. Deals such as Jubilant Group & Coca Cola and JSW-Akzo Nobel were backed by these non-bank players. Private credit funds collectively funded $9 billion worth of total deals in the first half of calendar year 2025.

In other cases, foreign lenders including Barclays, Deutsche Bank and Bank of America used entities in Singapore or other markets to channel acquisition loans into India.

"These new norms would change how alternate investment funds operate," said the head of a private credit firm. "Private credit funds, NBFCs and even mutual funds will find it hard to compete with the lower cost of capital that banks enjoy." Private credit funds have been among the most aggressive in the space, financing not just marquee takeovers but also smaller NCLT resolutions and mid-market acquisitions.

Lower Costs
Mutual funds and NBFCs participated in higher-rated structures, often at yields of 8% or more. With banks entering the space, the pricing is expected to compress. Jubilant's recent financing, for example, was at 8.7% by funds, a rate banks can undercut at 7-7.5%.