India is considering allowing foreign investors to hold up to 49% equity in state-run banks, more than double the current 20% cap, in a move aimed at attracting overseas capital and aligning public sector banking rules with those of private lenders, according to a person familiar with the discussions.
The proposal, currently under review by the Finance Ministry and the Reserve Bank of India (RBI), is part of the government’s broader effort to modernize the banking sector and bolster funding availability. However, the plan is still at a preliminary stage and has not been finalized.
Foreign investor interest in India’s financial institutions has surged recently. Emirates NBD of Dubai recently invested $3 billion for a 60% stake in RBL Bank, while Japan’s Sumitomo Mitsui Banking Corporation increased its shareholding in Yes Bank from 20% to nearly 25%.
Capital Boost for PSU Banks
According to one source, several overseas investors have also expressed interest in India’s 12 state-owned banks, which collectively hold assets worth ₹171 trillion ($1.95 trillion) and account for over 55% of the banking sector. Raising the foreign investment ceiling would make it easier for these lenders to attract additional capital.
Following the Reuters report, the Nifty PSU Bank Index surged as much as 3.02% to a record high of 8,053.4, before closing 2.22% higher.
Aligning with Private Lender Norms
A second official confirmed that a proposal to raise the cap is under discussion. The change would help “narrow the regulatory gap” between state-owned and private banks. Currently, foreign investors can own up to 74% in private lenders.
Under the new framework, the government would retain at least a 51% stake in public sector banks, ensuring majority ownership remains with the state. As of now, government holdings in these banks are well above that level.
Foreign shareholding across PSU banks varies widely — from around 12% in Canara Bank to nearly zero in UCO Bank, as per exchange filings.
Addressing Sector Weaknesses
State-owned banks, often tasked with extending credit to underserved regions and social sectors, have historically faced higher levels of non-performing assets (NPAs) and lower profitability than private competitors.
In recent months, the RBI has eased several regulatory norms to encourage capital inflows and streamline ownership structures in the financial sector. However, safeguards such as the 10% voting rights limit for any single shareholder will remain in place to prevent undue influence or control.
Aiming for Long-Term Stability
India’s economy has averaged 8% growth over the last three fiscal years, driving strong demand for credit and making the country’s banking sector increasingly attractive to global investors. Mergers and acquisitions in India’s financial sector have risen 127% year-on-year, totaling $8 billion between January and September 2025.
The proposed FDI relaxation, if approved, could mark a significant milestone in India’s ongoing banking reforms — balancing the need for fresh capital with the imperative to safeguard national control over key financial institutions.
