India is considering changes to its strict bank ownership rules, signaling a possible shift to allow foreign investors greater access to the country’s fast-growing banking sector. The move comes as global interest in Indian banks rises, and the economy continues to expand rapidly.
RBI Signals Possible Rule Changes
The Reserve Bank of India (RBI) recently allowed Japan’s Sumitomo Mitsui Banking Corp to buy a 20% stake in Yes Bank, indicating more flexibility in foreign ownership. Now, two foreign players are competing for a majority stake in IDBI Bank, highlighting pressure on regulators to open up the sector.
RBI Governor Sanjay Malhotra said last week that the central bank is reviewing its shareholding and licensing policies. A source close to the RBI shared that there’s growing openness to let regulated foreign financial institutions own larger stakes, on a case-by-case basis.
Why Foreign Banks Want In
Analysts say the interest is driven by India’s rapid economic growth and its vast under-served banking market. Trade deals with other Asian and Middle Eastern countries could open up even more opportunities for international lenders.
“India’s strong economy and low banking penetration make it an attractive market,” said Madhav Nair, Deputy Chairman of the Indian Banks Association.
India Needs More Banking Capital
Experts also believe India must attract more long-term capital to support its banking infrastructure. Moody’s official Alka Anbarasu noted that India’s banking sector will need significant funds in the coming years.
“Bringing strong global banks into the system could help bridge the capital gap,” she said.
Foreign Banks Still Face Barriers
Currently, foreign strategic investors can hold only up to 15%, despite an overall cap of 74% for foreign ownership. Other restrictions include:
- A 26% cap on voting rights
- A rule requiring large investors to reduce stakes to 26% within 15 years
However, the RBI may now allow more time extensions and ownership flexibility, similar to what it did for Yes Bank’s $1.58 billion acquisition, the largest foreign bank deal in India to date.
Big Players Eye IDBI Bank
Two foreign investors, Fairfax Holdings (Canada) and Emirates NBD (UAE), are competing to acquire a 60% stake in IDBI Bank, currently owned by the government.
Emirates NBD recently received approval to set up a local unit, joining Singapore’s DBS and State Bank of Mauritius as the only major foreign banks with Indian subsidiaries.
A source familiar with the deal said Emirates’ move was linked to its plans to acquire IDBI Bank. Emirates declined to comment; Fairfax did not respond.
RBI Open to Flexible Regulations
A note from Fitch Ratings last week said the RBI may prefer well-performing foreign banks to acquire larger stakes through fully regulated subsidiaries. Increasing the 26% voting cap and the 15% investment limit could further attract global investors.
However, a key challenge remains: the voting cap is set by law and would require Ministry of Finance approval. Still, the RBI appears open to adjusting its stance on foreign strategic investors, especially given the limited domestic interest in owning and running banks.
“India must plan ahead to ensure a steady flow of long-term capital into its banking sector,” the source added.
