India Mulls Raising FDI Cap To 49% For PSU Banks Amid Jump In Foreign Interest: Report

India is considering allowing foreign direct investment of up to 49% in state-run banks, more than double the current 20% limit, news agency Reuters reported on Monday, citing a person directly involved in the policy discussions.

According to the report, the finance ministry has been in talks with the Reserve Bank of India for the past few months on the proposal, which has not yet been finalised. The move comes amid growing foreign interest in India's banking industry, underscored by Emirates NBD's $3 billion purchase of a 60% stake in RBL Bank and Sumitomo Mitsui Banking Corp's $1.6 billion acquisition of a 20% stake in Yes Bank, which the Japanese lender later increased by another 4.99%.

Raising the foreign ownership cap, officials told Reuters, could help state-run banks attract much-needed capital. Following the report on Monday, the Nifty PSU Bank index rose as much as 3.02% to a record 8,053.4, before closing 2.22% higher.

A revision of the 20% ceiling is under discussion, describing it as part of efforts to align rules for public sector lenders with those governing private banks, where foreign ownership is allowed up to 74%, the news agency reported, citing the persons privy to the development.

The government, however, plans to retain a minimum 51% stake in state-run banks, the report added, citing the sources.

India currently has 12 government-owned banks with combined assets of Rs 171 lakh crore as of March, accounting for 55% of the sector's assets. Foreign shareholding in these banks currently ranges from about 12% in Canara Bank to near zero in UCO Bank, data on exchanges show.

Despite their reach, public sector banks are often viewed as weaker than private peers due to their mandate to lend to underbanked sectors and open rural branches — factors that have contributed to higher bad loans and lower returns on equity.