Finance Ministry officials and the Reserve Bank of India (RBI) are in early discussions on several proposals aimed at building larger and more powerful banks to support the country’s rapid economic growth over the coming decades, according to Bloomberg.
These proposals include allowing large companies to apply for banking licences, encouraging non-bank finance companies (NBFCs) to become full-fledged banks, and making it easier for foreign investors to increase their stake in state-owned lenders.
According to Bloomberg, the talks are still at an early stage, and there is no clarity yet on when any decisions will be finalised. Both the Finance Ministry and the RBI have not responded to Bloomberg’s requests for comment.
Foreign investment limits may be eased
According to Bloomberg, officials are discussing increasing the cap on foreign direct investment (FDI) in public sector banks. At present, foreign investors can hold up to 20 per cent, subject to government approval. While the government wants to attract more global capital, it is likely to retain a majority stake in state-run banks to ensure public control, especially given the sector’s importance in a country with widespread poverty.
Banking sector reform on the table
India currently has one of the most tightly regulated banking sectors, with restrictions on the entry of large corporate groups and foreign players. No new banking licences have been issued in almost ten years. In 2016, the RBI barred large industrial houses from applying for banking permits.
Officials are now considering revisiting that rule — though with strict conditions. According to Bloomberg citing people familiar with the matter, conglomerates may be allowed to apply for licences but will face caps on shareholding and limits on how much control they can exert over the banks.
Mergers of smaller banks are also being discussed as another option to build scale in the sector.
Focus on southern India and NBFCs
The government is particularly keen to see larger lenders emerge in southern India, which has become a major hub for contract manufacturing for global companies like Apple, writes Bloomberg. The report highlights that authorities may also encourage NBFCs in the region to convert into banks to improve credit access and financial stability.
Only two Indian banks in global top 100
India’s banking system remains underdeveloped compared to other major economies. Currently, only State Bank of India (SBI) and HDFC Bank are among the top 100 global banks by assets. In contrast, the US and China dominate the top 10.
Prime Minister Narendra Modi aims to make India a developed country by 2047. To achieve his target of expanding GDP to around $30 trillion, banking sector credit will need to rise from 56 per cent of GDP to about 130 per cent.
Investor interest growing
Despite the challenges, international interest in Indian banking is rising. In May, Japan’s Sumitomo Mitsui Financial Group bought a 20 per cent stake in private lender Yes Bank for Rs 13,500 crore — the largest foreign investment in the sector so far.
Meanwhile, markets responded positively to news of possible reforms. The Nifty PSU Bank Index, which tracks state-run lenders, reversed an early 0.8 per cent decline to trade 0.5 per cent higher in afternoon trading in Mumbai. The index has gained around 8 per cent so far this year.