There is a big news in the banking industry. The Government of India is considering increasing the limit on foreign direct investment in state-run banks to as much as 49%, more than double the current ceiling of 20%, Reuters reported.
The finance ministry has been in talks with the Reserve Bank of India (RBI) over the proposal for the past two months. As per sources, the move is aimed at narrowing the regulatory gap with private banks, where foreign ownership of up to 74% is permitted. Recently, Foreign interest in India’s banking sector has risen sharply. Emirates NBD recently invested $3 billion deal to acquire 60% of RBL Bank and Sumitomo Mitsui Banking Corp invested $1.6 billion in Yes Bank.
India’s state-run banks with combined assets of ₹171 trillion as of March, account for 55% of the country’s banking system. Despite the planned hike in foreign investment limits, the government intends to retain at least 51% ownership in these banks Current foreign shareholding in state-run banks ranges from nearly 12% in Canara Bank to close to zero in UCO Bank. While the RBI has recently eased several banking rules to attract more global capital, safeguards such as a 10% cap on voting rights for a single shareholder will continue.
But Why..??
Public sector banks need large amounts of capital to meet regulatory requirements under Basel III norms, improve balance sheets, and finance economic growth. However, the government, which must retain a majority stake of at least 51% in these banks, faces fiscal limitations and cannot keep infusing capital regularly.
On the other hand, the Indian domestic market, though expanding, cannot fully meet the funding needs of PSBs. Investor appetite for PSU bank shares remains limited due to concerns over profitability, higher bad loans, and operational inefficiencies compared to private banks. Mutual funds and other domestic investors also prefer short-term, low-risk investments rather than long-term capital commitments. Moreover, since the government’s ownership cannot fall below 51%, there is only limited scope to raise funds from domestic equity markets.
Allowing FDI would help attract long-term global investors such as pension funds and sovereign wealth funds, who can bring stable and patient capital. This will reduce dependence on government funding, diversify capital sources, and help PSBs meet their growth and regulatory capital requirements.
