The government is examining a proposal to raise the foreign direct investment (FDI) cap in public sector banks (PSBs) to 49% from the current 20%, as part of a broader banking reform agenda aimed at strengthening capital and accelerating growth, financial services secretary M. Nagaraju said on Monday.
Nagaraju said inter-ministerial consultations are underway, with a proposed reform panel expected to review issues ranging from FDI limits and consolidation to voting rights in banks in general.
At present, foreign investment in PSBs is capped at 20%, while private sector banks can attract up to 74% FDI. Officials believe easing limits in PSBs could help them access long-term global capital, especially as credit demand expands.
PSBs raise Rs 45,000 crore
PSBs have already raised around ₹45,000 crore through instruments such as qualified institutional placements and offer for sale in FY26, and are expected to mobilise another ₹45,000–50,000 crore next financial year. Nagaraju said public sector banks’ total assets, which stood at ₹261 lakh crore in September 2025, are projected to double over the next five years.
However, policymakers acknowledge that ownership reform alone may not draw large investors. Voting rights remain a key constraint: shareholders in private banks can exercise up to 26% voting power, but investors in PSBs are capped at 10%, even with higher equity stakes.
This mismatch has limited foreign participation — overseas shareholding in SBI is just over 10%, and negligible in several smaller PSBs. Investors bat for closer alignment of FDI limits and voting rights with private bank norms, while retaining at least 51% government ownership in PSBs.
Private banks
The debate also extends to private banks, where investors have long sought higher voting rights. The cap was last raised from 10% to 26% in 2012, and both the RBI and the government remain cautious about further relaxation, citing governance and ownership concentration concerns.
The reform push follows a six-year pause in consolidation and is linked to the government’s ambition to build 3–4 large lenders, with at least two capable of entering the global top 20. The roadmap, discussed during the Finance Ministry’s “Manthan” exercise, could unfold between 2026 and 2028.
Separately, financial bids for the strategic sale of IDBI Bank are expected later this month, Nagaraju said. The government plans to divest a 30.48% stake, valued at roughly ₹33,000 crore.