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India’s government is weighing raising the foreign direct investment cap in publicly owned banks to 49 per cent from 20 per cent, in a move that would mark a significant step in the opening of the sector to overseas capital.
The proposal, raised by federal banking secretary M Nagaraju on Monday, reflects a broader shift in policy under Prime Minister Narendra Modi to liberalise the financial sector.
New Delhi and the Reserve Bank of India have grown increasingly comfortable with foreign investors taking large and, in some cases, controlling stakes in private-sector lenders.
In November, finance minister Nirmala Sitharaman said talks were ongoing between the government and the central bank over India’s need for “a lot of big, world class banks”.
The push is tied to Modi’s long-term development agenda, known as Viksit Bharat, which outlines a plan for India to reach developed nation status by 2047, the centenary of independence from British rule.
Reiterating that goal in Sunday’s budget speech, Sitharaman said the government would “comprehensively review the sector” and establish a “high-level committee on banking for Viksit Bharat” to chart the next phase of reform.
The government has already sought to strengthen public lenders through consolidation. In 2020, it merged 27 state-owned banks into 12 in an effort to create larger and more resilient institutions.
Foreign participation in public-sector lenders, which account for more than half of the country’s banking system with combined assets of about Rs171tn ($1.86tn), remains constrained.
India currently allows for a looser 74 per cent foreign investment in private banks, but caps that amount at 15 per cent for any single entity unless granted an exemption by the RBI.
Last year, the RBI approved a number of overseas investments on a case-by-case basis in a flurry of cross-border activity.
The largest was Japan’s Mitsubishi UFJ Financial Group’s acquisition of a 20 per cent stake in non-banking lender Shriram Finance for about $4.4bn.
Dubai-based Emirates NBD also bought a 60 per cent stake in mid-sized lender RBL Bank for $3bn, while Tokyo-based Sumitomo Mitsui Financial Group last year acquired 24.2 per cent of Yes Bank for about $1.7bn, becoming its largest shareholder.
Reserve Bank of India governor Sanjay Malhotra told the FT in December that the recent deal activity reflected the strength of India’s financial industry.
Malhotra said foreign entities “have become more comfortable with the Indian banking sector” following a period of turmoil and asset cleanups more than a decade ago.
He explained that the RBI does not have any concern “as long as we have patient capital from well diversified, well run foreign banks from friendly countries”.
