The Reserve Bank of India’s stance on foreign investment in Indian banks is refreshing. The recent flurry of deals transacted by Yes Bank, RBL Bank, and Federal Bank suggest the regulator is more than willing to enable foreign entities to drive the operations at some of the country’s smaller lenders.
That’s a practical approach as India’s banking system needs more long-term capital, better governance discipline, and faster diffusion of global best practices. Allowing higher foreign ownership—under a clear, rule-bound framework—delivers all three.
The RBI is therefore right to relax its stance on foreign investment in banks, and the government should back this direction. For example, Blackstone’s proposed capital infusion of Rs 6,200 crore into Federal Bank will ultimately increase the lender’s CET-1 ratio by a chunky 280 basis points to 17%. All of this will be growth capital enabling the lender to further enhance its franchise.
Five years back, in December 2020, with the blessings of the regulator, Lakshmi Vilas Bank (LVB) was amalgamated with DBS Bank India. Stronger lenders will mean more competition and hopefully better service for customers. Foreign ownership can help some of the lenders grow share in areas like trade finance or overseas borrowings. Currently, the larger lenders tend to corner disproportionately large shares in some segments.
To be sure, not every deal may work out well but foreign direct investment (FDI) has the potential to stabilise and transform businesses. It is patient capital and more lasting than fickle portfolio flows. Credible names like DBS, Sumitomo Mitsui Banking Corporation, or Emirates NBD can add value to the businesses they are buying. They have deep pockets needed to take these smaller lenders to the next stage.
DBS’s investment in LVB has turned out to be a win-win; India is now DBS’s fastest-growing business. To be sure, the entities buying into Indian lenders might feel hamstrung because their voting rights are capped at 26%, no matter how high their stakes. But that should not worry them if they have effective control.
Over time, once it is reassured that the risks are manageable, it is possible the regulator will loosen the controls. In the meantime, the RBI is likely to continue to adopt a liberal stance while allowing FDI in the financial sector, with regulatory guardrails. In fact, shares of foreign banks in small banks, and even in other smaller lenders like non-banking financial companies, would be welcome. There are several potential candidates and if there are credible takers, the regulator may not object.
The case for a calibrated opening is even stronger for state-run banks. Foreign ownership in public-sector banks (PSBs) is still capped by statute at 20%. The government should consider lifting this cap substantially while preserving its majority stake. Done right, this will crowd in capital, accelerate tech and risk-management upgrades, and reduce the taxpayer’s burden without diluting public purpose.
Enabling higher foreign stakes—particularly from strategic, fit-and-proper investors—lowers the system’s cost of capital and speeds up balance-sheet strengthening without fiscal outlays. The fear that higher foreign stakes threaten financial sovereignty is misplaced. India already maintains tough licensing, “fit-and-proper” screening, resolution, and capital rules. If anything, broader owner diversity reduces the risk of domestic group entanglements. Sovereignty resides in regulation and supervision, not in forcing small stakes. To begin with, allow higher FDI in smaller PSBs to avoid systemic risks.
