Key Points:
- The government may raise FDI cap in public sector banks from 20% to 49% to attract long-term global capital.
- Investor concerns remain over limited voting rights in state-run banks, which could restrict inflows despite higher caps.
- The reform agenda includes bank consolidation, capital strengthening, and IDBI Bank’s strategic sale as part of a broader sector push.
India’s government is considering raising the foreign direct investment cap in public sector banks to forty-nine per cent from twenty per cent to attract long-term global capital, Financial Services Secretary M. Nagaraju said Monday, as credit demand rises and banking reforms gather pace.
The proposal, under inter-ministerial review, is part of a broader effort to strengthen state-run lenders’ balance sheets and support economic growth. Nagaraju said a reform panel is expected to examine foreign investment limits, bank consolidation and voting rights across the sector.
“At present, foreign investment in public sector banks is capped at twenty per cent,” Nagaraju said. “Easing these limits could help banks tap stable, long-term capital, especially as credit growth accelerates.”
Private sector banks, by contrast, can attract up to seventy-four per cent foreign investment, reflecting a long-standing policy gap that officials and investors say constrains public lenders’ access to global funds.
Raised FDI cap Proposal Targets Capital, Credit Growth
Public sector banks have already raised about ₹45,000 crore in the current fiscal year through qualified institutional placements and offers for sale, Nagaraju said. They are expected to mobilise an additional ₹45,000 crore to ₹50,000 crore in the next financial year as loan demand expands.
Total assets of state-run banks stood at ₹261 lakh crore in September 2025 and are projected to double over the next five years, he said. Officials believe higher foreign investment limits could reduce reliance on government capital infusions while supporting balance-sheet growth.
The proposal comes as India’s banking system faces rising credit demand from infrastructure, manufacturing and retail borrowers. Policymakers say access to global pools of capital will be critical if public lenders are to compete with private banks and finance large projects.
However, officials cautioned that ownership reform alone may not be sufficient to attract major foreign investors.
Voting Rights, Ownership Limits Shape Investor Interest
A key concern for investors is voting power. Shareholders in private banks can exercise up to twenty-six per cent voting rights, but investors in public sector banks are capped at ten per cent, even if they hold larger equity stakes.
This mismatch has limited foreign participation in state-run lenders. Overseas shareholding in the State Bank of India is just over ten per cent, while several smaller public banks have negligible foreign ownership, according to government data.
“Investors want alignment between economic ownership and voting rights,” said a senior banking official involved in the consultations, who spoke on condition of anonymity. “Without that, higher raised FDI cap limits may not translate into meaningful inflows.”
Investors have argued for closer alignment with private bank norms while retaining at least fifty-one per cent government ownership in public sector banks, a threshold officials say remains nonnegotiable.
The debate also extends to private banks, where foreign investors have long sought higher voting rights. The cap was last raised from ten per cent to twenty-six per cent in 2012. Both the Reserve Bank of India and the government remain cautious about further relaxation, citing governance risks and concerns over ownership concentration.
Consolidation, IDBI Sale Part of Broader Banking Push
The raised FDI cap review is part of a wider reform agenda following a six-year pause in bank consolidation. The government aims to build three to four large lenders, with at least two capable of entering the global top twenty by assets.
The roadmap, discussed during the Finance Ministry’s “Manthan” exercise, could unfold between 2026 and 2028, officials said. It includes measures to strengthen capital, improve governance and enhance competitiveness.
Separately, financial bids for the strategic sale of IDBI Bank are expected later this month, Nagaraju said. The government plans to divest a thirty-point-four-eight per cent stake, valued at roughly ₹33,000 crore, as part of its disinvestment program.
Officials said the outcome of the IDBI sale and the raised FDI cap review would signal the government’s commitment to deeper banking reforms while balancing investor interest with financial stability concerns.
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