Foreign investors will be able to take a bigger stake in Indian banks; RBI is preparing to change the rules

Foreign investors will soon be able to get a larger stake in Indian banks. For this, the RBI is ready to amend related rules. It will facilitate long-term capital investment in India. RBI softened the rules in May and gave permission for Japan's Sumitomo Mitsui Banking Corp to acquire a stake of 20 percent in Yes Bank. Canada's Fairfax Holdings and Emirates NBD are also in the race at present to acquire a stake of 60 percent stake in IDBI Bank. It is an indication of the relaxation of the rules of foreign ownership. RBI Governor Sanjay Malhotra mentioned last week that the central bank is reviewing shareholding and licensing rules for banks as a part of a broader examination. 

RBI will consider letting regulated financial institutions take a larger stake. However, this may vary from case to case. Foreign banks are keen to strike deals in India, the fastest-growing major economy, especially as India is keen to strike regional trade agreements. Such agreements could open up new opportunities in India for global lenders in Asia and the Middle East.

Most of the big global banks, from Citibank to HSBC and Standard Chartered, have operations in India. They are primarily focused on the more profitable corporate and transaction banking sectors rather than bread-and-butter lending. Foreign banks account for less than 4 per cent of total Indian bank loans.

Madhav Nair, vice-chairman of the Indian Banks Association, said the sentiment is driven by India's strong economic growth and access to a large market. Indian regulators are concerned that India is lagging behind other major economies in raising banking capital, which will be crucial to sustaining rapid economic growth. India will need more capital for its banking system over the medium term, said Alka Anbarasu, associate managing director at Moody's Investors Service.