RBI Considers Raising Foreign Investment Limits in Indian Banks

The Reserve Bank of India (RBI) is currently discussing whether to allow more foreign ownership in Indian banks, but no final decision has been made yet. According to sources, this matter will not be shared with the public unless there is complete agreement within the RBI.

Current Rules on Foreign Investment in Banks

At present, foreign institutions can hold up to 15% in an Indian bank. However, if a foreign investor wants to own more than 5%, they must first get approval from the RBI.

There have been some special cases where exceptions were made:

• Fairfax was allowed to buy 51% of Catholic Syrian Bank.
• SMBC (Sumitomo Mitsui Banking Corporation) got approval to buy a 20% stake.

These approvals were given only after careful case-by-case reviews and special permissions.

Why is RBI Discussing This Now?

The RBI’s internal talks are believed to be linked to strategic bank sales, especially the case of IDBI Bank. The Government of India and LIC (Life Insurance Corporation) are trying to sell their stake in IDBI Bank to a new buyer.

There is growing foreign interest in IDBI Bank, and one of the key contenders is Emirates NBD, a large banking group based in Dubai, according to a report by Moneycontrol. This shows the need for more relaxed foreign ownership rules to attract serious investors from outside India.

Different Rules for Foreign Banks in India

Foreign banks in India operate in two main ways:

1. As branches – Like HSBC or Standard Chartered, these face stricter rules, especially when it comes to opening new branches.
2. As wholly-owned subsidiaries – Like SMBC, these are treated the same as Indian banks and have more operational freedom.

Maximum Foreign Investment Limit and Voting Rights

Currently, foreign investment in private banks in India—combining Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)—is allowed up to 74%. However, there’s a major limitation:

• No single foreign investor is allowed to exercise more than 26% voting rights, no matter how much ownership they hold.

This rule comes from the Banking Regulation Act, not from RBI guidelines, and is not part of the current discussions.

Will Indian Companies Be Allowed to Own Banks?

There is no indication that Indian private manufacturing companies will be allowed to buy stakes in banks, according to the sources. This rule continues to prevent industrial or corporate houses from entering the banking sector directly.