RBI Signals Major Policy Shift
India’s central bank, the Reserve Bank of India (RBI), is considering changes to bank ownership rules. This move could allow foreign investors to own larger shares in Indian banks. The decision comes as India’s economy grows fast, and overseas firms look for new investment opportunities.
Recent Deals Spark Regulatory Review
Last month, the RBI allowed Japan’s Sumitomo Mitsui Banking Corp to buy a 20% stake in Yes Bank. This was a big shift in rules. Also, two foreign companies are now competing for a large stake in IDBI Bank, which is owned by the government.
RBI Governor Sanjay Malhotra said that the bank is reviewing ownership and licensing rules. A source close to the RBI shared that the central bank may allow larger ownership on a case-by-case basis and work to remove roadblocks for foreign takeovers.
Why Foreign Banks Want In
Experts say foreign banks are excited about India because of its strong economic growth and large untapped banking market. India is also working on more regional trade deals, which may create new business for foreign banks.
According to Madhav Nair of the Indian Banks Association, global interest is rising because India offers long-term growth potential.
India Needs More Banking Capital
Indian regulators are also aware that the country needs more capital in its banking system. This will help maintain economic growth. Moody’s Investors Service noted that bringing in international banks could help fill this gap.
Foreign Banks Face Challenges
Even though banks like Citibank, HSBC, and Standard Chartered operate in India, they mostly focus on big business clients. They avoid regular lending services.
Foreign banks currently control less than 4% of India’s total bank credit. This is partly because of tight rules. Foreign investors can own up to 74% through stock markets, but strategic investors are limited to 15% ownership.
Other hurdles include a 26% cap on voting rights and a rule that large stakes must be reduced to 26% within 15 years.
Possible Relaxation of Rules
Sources say the RBI may give foreign buyers more time to meet shareholding rules. It also appears open to ownership above 15%, as shown in the Yes Bank deal, which was worth $1.58 billion—the largest foreign banking deal in India to date.
IDBI Bank in High Demand
Two foreign investors—Fairfax Holdings (Canada) and Emirates NBD (UAE)—are interested in buying a 60% stake in IDBI Bank.
Recently, Emirates NBD received approval to open a local branch in India. It is the third foreign bank to do so, after Singapore’s DBS and the State Bank of Mauritius.
Future Outlook
According to Fitch Ratings, increasing the voting cap or ownership limit may encourage more foreign interest. But the 26% voting limit is set by law and would need a change from the Finance Ministry.
The RBI may still revise its stance on foreign strategic investors, especially because domestic players show little interest in running banks.
As one official put it:
“We must carefully think about where our long-term banking capital will come from.”
