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India is considering allowing foreigners to hold up to 49% stake in its public sector banks as policymakers look to increase capital in these lenders to fund growth, without giving up control completely.
“We need to increase the credit-to-GDP ratio to 150% from the current 56%,” Federal Banking Secretary M. Nagaraju told reporters on Monday. “We need to look at whether we should have additional capital or deploy existing capital more effectively or whether we should look at the capital adequacy ratio. All this requires a calibrated approach.”
Foreign ownership in the largest lender State Bank of India and 11 other public sector banks is limited to 20% – a legacy restriction rooted in the government’s desire to retain strategic control of the financial system. This limit is much lower than the 74% foreign investment allowed in private sector banks and 100% foreign direct investment allowed in the insurance sector.
foreign interest in indian banks
Billion-dollar deals for Indian banks have put the country’s financial sector in the global spotlight. International investors are exploring opportunities in India, building on the momentum of previous years and investing in lenders, insurance and fintech players.
The government wants banks to finance large-scale private investment to help drive the rapid growth needed to transform India into a developed economy by 2047, a target set by Prime Minister Narendra Modi.
Nagaraju said India aims to have three-four large banks capable of financing development in the world’s fastest growing major economy. Currently, only SBI and HDFC Bank Ltd figure among the world’s top 100 lenders by total assets.
FDI limit in PSU banks
Vivek Ramji Iyer, partner, Grant Thornton India, said the higher foreign limit could potentially enhance operational efficiency in public sector banks, as increased foreign capital leads to increased investor activism which helps enhance the overall competitiveness of the organization.
Ownership limits apply to all foreign holdings, including foreign institutional investors, pension funds and other non-resident shareholders. While portfolio investors can freely buy SBI shares within limits, any violation would require regulatory intervention, effectively disrupting demand for global funds, even as India’s equities gain weight in international benchmarks.
In practice, foreign stake in public sector banks remains well below the limit, leaving unused space for foreign capital. The government holds more than 51% stake in each of India’s 12 state-owned lenders.
