In October 2025, the Reserve Bank of India (RBI) issued the draft circular on acquisition financing that proposes to allow banks to finance as much as 70% of the acquisition value.
- The RBI also released a draft circular proposing limits on banks’ exposure to capital markets and acquisition finance.
Exam Hints:
- What? Draft Circular on Acquisition Financing
- New Norms: Funding – 70%, 30% – by Acquiring Company
- Tier -1: Acquisition finance not exceed 10% of Tier 1
- Acquiring Company: Satisfactory net worth, profit making for the last 3 years, Debt-equity: Max 3:1
- What? CME limit
- Direct Exposure: 20% of Tier 1
- Aggregate Exposure: 40% of Tier 1
- What? Implementation of ECL and Basel III
- Effective Date: April, 2027
Funding Acquisitions
The draft framework, “RBI (Commercial Banks – Capital Market Exposure CME)) Directions, 2025” has proposed to allow banks to finance corporate acquisitions in India and abroad.
New Norms: Under the proposed framework, banks will be permitted to fund up to 70% of the acquisition value, with the remaining 30% to be contributed by the acquiring company.
- This means if the acquisition cost is Rs 10,000 crore (cr), banks can lend up to Rs 7,000 cr to fund the acquirer.
Cap on Tier-1 Capital: The RBI has proposed that the aggregate exposure of a bank to acquisition finance shall not exceed 10% of its Tier-1 Capital.
Acquiring Company: It must be a listed entity with a satisfactory net worth and a profit-making track record for the last three years. Financial intermediaries such as Non-Banking Financial Company (NBFCs) and Alternative Investment Fund (AIFs) are not eligible borrowers.
Note*The norms will take effect from April 1, 2026.
RBI’s new CME rules
The RBI proposed the framework, “The Capital Market Exposure Directions, 2025” seeking to redefine how banks engage with capital markets while ensuring prudential risk control.
Effective: These directions will come into effect from April 1, 2026, or an earlier date when adopted by a bank in entirety.
Capital Market: The RBI in the draft guidelines, stated that banks’ total direct investments in capital markets and acquisition finance must not exceed 20% of their tier 1 capital.
- Additionally, the RBI proposed that the aggregate capital market exposure of banks should not exceed 40% of their tier 1 capital.
RBI to implement ECL framework, Full Basel – III Norms
Expected Credit Loss (ECL) framework: The ECL model moves away from the traditional incurred-loss approach to a forward-looking method, requiring banks to provision for possible future losses based on detailed credit risk assessment and broader data signals.
- The RBI proposed that the framework is proposed to be made applicable to all Scheduled Commercial Banks (excluding Small Finance Banks (SFBs), Payment Banks (PBs), Regional Rural Banks(RRBs)) and All India Financial Institutions (AIFIs) with effect from April 1, 2027.
- It also gives a glide path of nearly four years to smoothen any impact from higher provisioning.
Basel –III: It is proposed to make the revised Basel III capital adequacy norms effective for commercial banks (excluding SFBs, PBs and RRBs) from April 1, 2027.
Note:
Basel – III: India’s Basel III capital ratios are higher than the global minimum Basel III norms. Under the Basel III framework globally, the minimum capital adequacy ratio (CAR) is 8%, plus a capital conservation buffer (CCB) of 2.5%, totaling 10.5%. In contrast, the RBI mandates a higher minimum CAR of 9% and including CCB it is 11.5%.
