India May Ease Bank Ownership Rules Amid Rising Foreign Investment Interest

MUMBAI, June 3 (Reuters) – India’s central bank is reviewing its stringent bank ownership regulations in a bid to attract more foreign investment, as global financial institutions show growing interest in tapping into the country’s booming economy and underpenetrated banking market.

The Reserve Bank of India (RBI) recently made a rare exception to its rules, allowing Japan’s Sumitomo Mitsui Banking Corp (SMBC) to acquire a 20% stake in Yes Bank a move seen as a signal of possible regulatory shifts. The deal, valued at $1.58 billion, marks the largest cross-border acquisition in India’s financial sector to date.

Additionally, two global players Canada’s Fairfax Holdings and Dubai-based Emirates NBD are currently competing to acquire a 60% stake in state-run IDBI Bank, further underscoring the rising foreign interest in Indian banking assets.

Rule Revisions Under Consideration

RBI Governor Sanjay Malhotra confirmed in a recent interview with the Times of India that the central bank is reviewing current licensing and shareholding norms. A source familiar with the matter said the RBI is increasingly open to allowing regulated foreign financial institutions to own larger stakes in Indian banks — with flexibility applied on a case-by-case basis.

The regulator is also examining ways to address longstanding deterrents to foreign investment, such as:

• A 15% cap on strategic foreign ownership
• A 26% limit on voting rights
• Mandatory stake reductions for promoters over 15 years

These rules are considered some of the most restrictive globally. While total foreign ownership of banks is permitted up to 74%, strategic investors are constrained by these limits, often discouraging long-term commitments.

Foreign Banks Eye India’s Growth

India’s appeal lies in its rapid economic expansion and evolving trade dynamics. Analysts say the world’s fastest-growing major economy presents huge opportunities for global banks, particularly as New Delhi pursues regional trade agreements across Asia and the Middle East.

“India’s strong economic growth and under-penetrated banking market make it a highly attractive target,” said Madhav Nair, Deputy Chairman of the Indian Banks Association.

Alka Anbarasu, Associate Managing Director at Moody’s Investors Service, echoed similar sentiments: “India will need significant capital to support its banking system in the medium term. Welcoming strong international players could help meet that need.”

Despite this interest, foreign banks currently account for less than 4% of outstanding bank credit in India, according to RBI data. Their focus has traditionally been on corporate banking, transaction services, and trading, rather than retail lending.

Policy Shift on the Horizon?

Sources indicate that the RBI may consider extending timelines for mandatory stake reductions and increasing flexibility in foreign ownership norms. However, some restrictions like the 26% cap on voting rights are embedded in legislation and would require intervention from the Finance Ministry.

Ratings agency Fitch noted last week that easing the 15% ownership cap or the 26% voting ceiling could incentivize more foreign participation. It added that the RBI prefers well-regulated, high-performing global banks to operate in India via wholly owned subsidiaries.

Emirates NBD, which recently secured approval to set up an Indian subsidiary, could become only the third major foreign bank to do so, following Singapore’s DBS and the State Bank of Mauritius. This move is seen as part of its long-term plan to acquire a controlling stake in IDBI Bank.

As India faces a growing need for long-term banking capital, the central bank appears poised to rethink outdated restrictions. A source familiar with the RBI’s strategy summed it up: “The question is where will the long-term capital come from? That has to be thought through carefully.”