India’s public-sector banks may soon see a major policy change. The government is reportedly considering increasing the foreign direct investment (FDI) limit in state-run lenders to 49% from the current 20% cap. Discussions are underway between the finance ministry and the Reserve Bank of India (RBI), according to a Reuters report, but a formal proposal is yet to be finalised.
At present, foreign investors can hold up to 74% in private banks, with automatic approval up to 49%. In contrast, state-owned banks are restricted to a 20% ceiling, and that too requires government approval. The proposed increase is seen as an attempt to attract more overseas capital and bring public-sector lenders in line with their private counterparts.
The timing of the move is not accidental. As credit demand rises and balance sheets expand, public-sector banks could benefit from deeper access to global funding. Over the past year, foreign investors have shown renewed interest in Indian financial institutions. Deals like Emirates NBD’s plan to acquire a 60% stake in RBL Bank for ₹26,853 crore and Sumitomo Mitsui Banking Corporation’s move to pick up 20% in Yes Bank for ₹13,483 crore are just a few examples of the appetite in the market.
Even global private equity giants have been scouting opportunities. Warburg Pincus and Abu Dhabi Investment Authority affiliates are reportedly eyeing stakes in IDFC First Bank, while a Blackstone entity plans to buy nearly 10% in Federal Bank. Analysts say this wave of investor interest stems from lower bad loans, moderating credit costs and faster loan growth across retail, SME and microfinance segments.
Even if the FDI cap is raised, the government is unlikely to let go of its control. Sources suggest that key restrictions will remain intact, including a 10% cap on voting rights for any single shareholder. This would ensure that no single investor gains arbitrary control or undue influence in a public-sector bank. The RBI governor had earlier mentioned that the regulator is reviewing ownership rules and eligibility limits across banks, but hinted that the process could take time.
Currently, foreign ownership in state-run banks is uneven. Canara Bank has around 12% foreign shareholding, while others like Uco Bank have negligible or none at all. The idea of allowing up to 49% could help these institutions attract strategic investors without diluting government majority control, as the state would still hold at least 51%.
The move, if cleared, would mark a cautious but significant reform. It could make public-sector banks more competitive and better capitalised at a time when credit growth is expected to remain strong. However, the final contours of the proposal — such as the mix of direct and portfolio investment and the conditions for foreign ownership — will determine its real impact.
While the government had previously liberalised FDI norms in sectors like insurance, raising limits up to 100%, banking remains a sensitive space. The push towards higher foreign participation could strengthen the system, but it also needs to preserve public trust and governance stability.
For now, all eyes are on the finance ministry and the RBI. If the proposal moves ahead, it could reshape how India’s biggest lenders raise capital — and how much foreign money flows into their vaults.
