Exclusive: India Plans to Raise Foreign Investment Cap in State-Run Banks to 49%, Sources Say

India is considering allowing up to 49% direct foreign investment in state-run banks—more than double the current limit—according to a person directly involved in the policy discussions.

The person said the Finance Ministry has been holding talks with the Reserve Bank of India (RBI) for several months on the proposal, which has not yet been finalized.

Interest from foreign investors in India’s banking sector has been rising, highlighted by Emirates NBD’s $3 billion acquisition of a 60% stake in RBL Bank and Sumitomo Mitsui Banking Corp’s $1.6 billion purchase of 20% of Yes Bank, which the Japanese lender later increased by another 4.99%.

The source added that there is growing interest from foreign investors in public-sector banks, and raising the ownership cap could help these institutions access more capital in the coming years.

Following Reuters’ report on the proposal, the Nifty PSU Bank Index (.NIFTYPSU) jumped 3.02% to a record high of 8,053.4 before closing 2.22% higher.

Narrowing the Gap

A second source confirmed that a plan to raise the current 20% ceiling is under discussion, calling it part of an effort to narrow the regulatory gap between public and private banks. India currently allows up to 74% foreign ownership in private lenders.

The proposal to raise the limit for state-run banks to 49% has not been previously reported.

Both sources declined to be named, as the discussions are not public. The Finance Ministry and the RBI did not immediately respond to Reuters’ requests for comment.

India’s robust economic growth—averaging around 8% over the past three fiscal years—has fueled strong credit demand, increasing investor appetite for its lenders. Between January and September, deals in India’s financial sector surged 127% to $8 billion.

Twelve State-Run Banks

India currently has 12 state-owned banks, holding total assets worth ₹171 trillion ($1.95 trillion) as of March—about 55% of the country’s banking sector.

According to the first source, the government intends to retain at least a 51% stake in these banks. At present, it holds majority ownership in all 12.

Stock exchange data shows that foreign ownership in state-run banks ranges from nearly 12% in Canara Bank (CNBK.NS) to almost zero in UCO Bank (UCBK.NS).

Public-sector banks are often seen as weaker than their private counterparts, tasked with extending credit to lower-income populations and operating in remote areas. As a result, they are more exposed to bad loans and tend to deliver lower returns on equity.

Safeguards to Remain

The RBI has recently taken steps to simplify regulations in the banking sector and has shown greater openness to allowing foreign banks to hold larger stakes in Indian private lenders.

However, the first source noted that certain safeguards would remain to prevent undue control and influence, including a continued 10% cap on voting rights for any single shareholder.

(Exchange rate: $1 = ₹87.8950)