RBI’s Latest Credit Reforms for Commercial Banks

The Reserve Bank of India (“RBI”) has introduced significant changes to the Reserve Bank of India (Commercial Banks – Credit Facilities) Directions, 2025 through the Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026, issued on 13 February 2026. These amendments, which will come into effect from 1 April 2026, mark an important evolution in the regulatory framework governing how commercial banks extend credit.

Overall, the reforms reflect a calibrated approach encouraging legitimate corporate growth and acquisition activity while safeguarding financial stability and preventing excessive risk-taking.

Introduction of a Formal Acquisition Finance Framework

A key highlight of the amendments is the introduction of a formal framework for acquisition finance. For the first time, Indian commercial banks are expressly permitted to finance strategic equity acquisitions by non-financial companies. This represents a notable policy shift, as leveraged buyouts and takeover financing in India have historically been dominated by private credit funds, non-bank lenders, and foreign institutions. By enabling domestic banks to participate in such transactions, the RBI has broadened funding avenues for mergers and acquisitions, potentially deepening India’s corporate finance ecosystem.

Prudential Safeguards and Eligibility Criteria

The permission is accompanied by robust prudential safeguards. Only companies with a minimum net worth of ₹500 crore are eligible to access acquisition finance from banks, thereby restricting such funding to financially sound and well-capitalised entities. In addition, banks may finance only up to 75% of the acquisition value. The acquiring company must therefore contribute at least 25% of the transaction value through internal accruals, promoter contribution, or fresh equity infusion. This requirement ensures meaningful “skin in the game” and limits excessive leverage.

Stricter Norms for Capital Market Intermediaries

The amendments also tighten norms governing lending to capital market intermediaries (“CMIs”), such as stockbrokers, clearing members, and custodians.

Newly introduced Chapter XIII-A mandates that credit facilities extended to CMIs must be fully secured. While banks may continue to provide funding for genuine operational needs including settlement obligations and working capital, lending for proprietary trading activities by brokers is expressly prohibited. This move is aimed at containing systemic risk arising from leveraged market positions.

Revised Loan-to-Value (LTV) Caps for Loans Against Financial Assets

The RBI has prescribed revised Loan-to-Value (“LTV”) caps for loans against financial assets to moderate retail leverage. Loans against listed equity shares are now capped at a maximum LTV of 60%, while loans against mutual fund units may be extended within a range of 75% to 85%, depending on the scheme’s risk profile. For IPO financing and ESOP-related loans to individuals, the existing regulatory ceiling of ₹25 lakh per borrower remains unchanged.

Enhanced Disclosure and Transparency Requirements

Transparency requirements have also been strengthened. Under the Financial Statements (Presentation and Disclosures) Third Amendment Directions, 2026, banks must now provide detailed disclosures of acquisition finance exposures and lending to CMIs in their “Notes to Accounts.”

This enhanced reporting is intended to give regulators, investors, and stakeholders clearer visibility into risk concentrations and credit quality.

Concluding Perspective

In sum, the 2026 Amendment Directions signal a nuanced shift in regulatory philosophy. Rather than imposing blanket restrictions, the RBI is granting banks greater operational flexibility within a structured, risk-sensitive framework.

The reforms seek to balance the need to support corporate expansion and capital market functioning with the imperative of maintaining prudential discipline and systemic stability.

References

1. Reserve Bank of India (Commercial Banks- Credit Faciities) Direction, 2025, Notification No. RBI/DOR/2025-26/154, November 28, 2025
2. Reserve Bank of India (Commercial Banks- Credit Facilities) Amendment Direction, 2026, Notification No. RBI/2025-26/211, February 13, 2026
3. Reserve Bank of India (Commercial Banks- Financial Statements: Presentation and Disclosures) Third Amendment Directions, 2026, Notification No. RBI/2025-26/214, February 13, 2026.