India is considering allowing up to 49% direct foreign investment in state-run banks, which is more than double the current 20% cap, according to a person involved in the policy talks.
The finance ministry has been in discussions with the Reserve Bank of India (RBI) about the proposal for the past few months, but the plan has not yet been finalized.
India Plans to Raise Foreign Investment Cap in State-Run Banks to 49%
Foreign interest in India’s banking industry is increasing, as seen in Dubai-based Emirates NBD’s $3 billion purchase of a 60% stake in RBL Bank and Sumitomo Mitsui Banking Corp’s $1.6 billion acquisition of a 20% stake in Yes Bank, which was later raised by another 4.99%.
State-owned banks are also drawing attention from overseas investors, and raising the foreign investment limit is expected to help them attract more capital in the coming years.
Following the Reuters report on the proposed change, the Nifty PSU Bank index rose as much as 3.02% to a record high of 8053.4 and closed 2.22% higher.
A second source confirmed that the increase from the current 20% limit is being discussed, noting that the move aims to align regulations for public and private banks.
India currently allows foreign ownership of up to 74% in private sector banks, so the proposed 49% limit for state-run banks would help reduce the regulatory gap.
The idea to raise the foreign investment cap for state-run banks to 49% has not been publicly reported before.
Both sources requested anonymity because the discussions are not yet public, and neither the finance ministry nor the RBI responded to Reuters’ requests for comment.
India’s Rapid Economic Growth Boosts Investor Interest in Banking Sector
India’s strong economic growth—averaging around 8% over the last three fiscal years—has fueled rising credit demand, making the country’s banking sector more appealing to investors.
Deals in India’s financial sector have surged 127% to reach $8 billion between January and September.
India currently has 12 government-owned banks with combined assets of 171 trillion rupees ($1.95 trillion) as of March, accounting for 55% of the total banking sector.
The government plans to maintain at least a 51% ownership stake in all state-run banks, according to the first source.
Presently, government ownership in all 12 public banks is significantly higher than 51%.
Foreign ownership in state-run banks varies widely, from around 12% in Canara Bank to nearly zero in UCO Bank as of September 30, based on stock exchange data.
Public sector banks are generally considered weaker than private ones, as they are often required to lend to lower-income groups and open branches in rural areas, leading to higher bad loans and lower returns on equity.
The RBI has recently taken several steps to ease regulations and has become more open to letting foreign banks hold larger stakes in Indian private lenders.
However, safeguards will remain in place to prevent arbitrary control, including a cap that limits any single shareholder’s voting rights to 10%, according to the first source.
