India is planning to raise the foreign investment cap in state-run banks to 49 percent, a move aimed at strengthening capital inflows and aligning public lenders more closely with their private-sector counterparts. The proposal, currently under discussion between the Finance Ministry and the Reserve Bank of India (RBI), would more than double the existing ceiling of around 20 percent, Reuters reported on Monday, quoting government sources.
The report said that the proposal seeks to attract greater foreign participation while ensuring that the government retains majority ownership, with at least 51 percent equity in public sector banks. The proposal is part of a broader financial-sector reform agenda that aims to boost efficiency, improve governance, and support the country’s expanding credit needs.
Officials familiar with the matter said the revised limit would apply to both direct and portfolio investments, subject to safeguards such as a cap on individual shareholder voting rights—likely to remain around 10 percent—to prevent any loss of government control. The government is expected to issue detailed guidelines once consultations with the RBI are complete.
Analysts in banking industry say higher foreign participation could help public banks strengthen their balance sheets, reduce their dependence on government capital injections, and improve access to global expertise and technology. Public sector banks currently hold over half of India’s banking assets but lag behind private peers in profitability and operational efficiency.
The reform would also bring public banks closer to regulatory parity with private lenders, where foreign ownership can go up to 74 per cent. Market analysts note that the proposal could trigger significant inflows into major state-owned lenders such as State Bank of India, Bank of Baroda, and Punjab National Bank. Following reports of the plan, shares of public sector banks rose sharply on the exchanges.
Raising the foreign investment cap is expected to ease capital constraints, support credit expansion, and help finance sectors like infrastructure and small businesses. However, experts caution that the move’s success will depend on the fine print—particularly how governance safeguards are framed and how investor limits are structured.
While the proposal signals India’s intent to open up its financial system and attract long-term foreign capital, policymakers will have to balance reform momentum with the need to maintain public control and financial stability. If implemented effectively, the decision could mark a major step in modernising India’s public banking system and enhancing investor confidence in the sector.
