The foreign direct investment limit in public sector banks could increase to 49 per cent from its current cap of 20 per cent to help attract overseas investments and align regulations with those for private lenders. According to a Reuters report, the finance ministry has been discussing the matter with the Reserve Bank of India, but a proposal is yet to be finalised.
India allows foreign ownership of up to 74 per cent in private banks, with automatic approval up to 49 per cent. However, state-run lenders have been restricted to a 20 per cent cap, subject to government approval. Raising this ceiling to 49 per cent could help these banks access more capital and strengthen their balance sheets as credit demand grows.
After the June monetary policy, RBI governor Sanjay Malhotra had indicated that the regulator is examining the entire ownership structure and eligibility limits of investment in banks, but had said that the process will take time.
Even as the government is looking to increase the overall FDI limit, the requirement of the RBI's permission in areas such as a 10 per cent cap on voting rights for any single shareholder is likely to be retained to continue to prevent arbitrary control and ensure stable governance in PSU banks. At present, foreign ownership in state-run banks ranges from around 12 per cent in Canara Bank to nearly zero in Uco Bank, according to September-end stock exchange data.
Recently, the banking sector, particularly private banks, has seen a surge in foreign investor interest. Emirates NBD has proposed to acquire a 60 per cent stake in RBL Bank for ₹26,853 crore, while Sumitomo Mitsui Banking Corporation is looking to pick up a 20 per cent stake in Yes Bank for ₹13,483 crore.
Warburg Pincus and Abu Dhabi Investment Authority affiliates are looking to buy a 9.48 per cent stake and a 5.10 per cent stake in IDFC First Bank for ₹7,500 crore, while a Blackstone group entity is planning to acquire a 9.99 per cent stake in Federal Bank for ₹6,196 crore.
Analysts attribute the investor interest to declining slippages, moderating credit costs and accelerating loan growth, accompanied by encouraging commentary across retail, SME and microfinance portfolios. The government has already raised the FDI limit in the insurance sector from 74 per cent to 100 per cent in a bid to draw more capital to support the sector’s growth.