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The government reportedly plans to allow foreign direct investment in state-owned banks of up to 49 percent, a move that would more than double the current limit. According to a Reuters report that cited people with direct knowledge of the policy discussions, the Finance Ministry has been in talks with the Reserve Bank of India (RBI) for several months, but the proposal has not yet been finalized.
The initiative is seen as a strategy to attract more foreign capital and strengthen public sector banks in response to growing demand for credit and increased foreign interest in India’s financial sector.
Foreign interest in India’s banking industry has grown, as illustrated by recent large transactions such as Emirates NBD’s acquisition of a 60 per cent stake in RBL Bank for $3 billion and Sumitomo Mitsui Banking Corp’s purchase of a 20 per cent stake in Yes Bank for $1.6 billion, which later increased by almost 5 per cent. State-owned banks are also attracting the attention of international investors, and the proposal to increase the limit for these banks to 49% has not been previously reported.
Another source confirmed to the news agency that an increase from the current 20 percent limit is being discussed, adding that the move is also part of an attempt to reduce the gap between regulations for private and government-owned banks.
India currently allows foreign ownership of up to 74 per cent in private sector lenders, while the limit for public sector banks is 20 per cent. The proposed increase would bring state banks closer to their private counterparts, potentially making them more attractive to investors.
India’s banking sector has seen robust activity, with deals in the financial sector increasing 127 percent to $8 billion between January and September, driven by strong economic performance that has averaged 8 percent growth over the last three fiscal years.
India has 12 government-owned banks that together hold assets of Rs 171 lakh crore ($1.95 trillion) as of March, accounting for about 55 percent of the sector. The government intends to continue holding at least 51 percent of the shares of these banks. Current foreign ownership in these banks varies, from around 12 percent in Canara Bank to almost zero in UCO Bank as of September 30, according to stock exchange data.
As part of regulatory reform, the RBI recently took steps to relax banking sector rules and signaled greater openness towards greater foreign stakes in private lenders. However, protective measures will remain in place for state banks. Certain safeguards will remain in place to prevent arbitrary control and decision-making, including a limit on voting rights of 10 percent for a single shareholder.
