According to a Reuters report citing sources familiar with the matter, India is considering increasing the foreign direct investment limit in state-run banks to 49%, more than double the current cap. The finance ministry has been deliberating with the Reserve Bank of India (RBI) on this proposal over recent months, though the plan has yet to be finalized.
Foreign investors have shown rising interest in the sector, 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 a 20% stake in Yes Bank, which was later raised by an additional 4.99%.
Meanwhile, interest from investors in state-run banks has also been growing. Boosting the ownership ceiling is expected to ease capital-raising for these lenders moving forward, the source said. Following the Reuters report, the Nifty PSU Bank index climbed as much as 3.02% to a record 8,053.4 before closing with an increase of 2.22%.
On the other hand, another source, according to the report, confirmed that raising the cap from 20% is being considered and noted that the initiative also aims to narrow the regulatory gap between public and private sector banks, since India already allows up to 74% foreign ownership for private lenders. Note that the proposal regarding a 49% cap has not been previously reported.
India’s economy has averaged 8% growth over the past three years, increasing credit demand and enhancing the appeal of Indian banks. Deal volume in the country’s financial sector surged 127% to $8 billion during the first nine months of the year.
India’s 12 state-run banks, with combined assets of 171 trillion rupees ($1.95 trillion) as of March, account for 55% of the nation’s banking sector. The government intends to retain at least a 51% stake in these banks, as its current holdings are significantly higher.
As of September 30, foreign holdings in state-run banks ranged from approximately 12% in Canara Bank to nearly zero in UCO Bank, based on exchange data.
The RBI has recently relaxed several banking regulations and become more receptive to allowing foreign banks larger stakes in private lenders. However, the source indicated that safeguards will remain in place to prevent undue influence, including a 10% voting rights cap for any single shareholder.
