India Considers Major FDI Policy Shift for Public Sector Banks
The Indian Finance Ministry is actively considering a significant policy change that would raise the foreign direct investment (FDI) limit in public sector banks (PSBs) from the current 20 per cent to 49 per cent. This strategic move aims to strengthen the capital base of state-run lenders and support their expansion plans in the coming years.
Inter-Ministerial Consultations Underway
Financial Services Secretary M Nagaraju confirmed that inter-ministerial consultations are currently in progress regarding this proposed increase. "We are still considering, and inter-ministerial consultation is on for raising FDI cap to 49 per cent," Nagaraju stated, highlighting the ongoing evaluation process within the government.
Current FDI Landscape in Indian Banking
At present, India maintains different FDI limits for public and private sector banks:
- Public sector banks have an FDI cap of 20 per cent
- Private sector banks can receive up to 74 per cent foreign investment
- In private banks, FDI up to 49 per cent is permitted through the automatic route
- Investment beyond 49 per cent and up to 74 per cent requires government approval
This disparity has been a point of discussion among policymakers seeking to create a more level playing field while ensuring adequate capital flows to the banking sector.
Capital Raising and Government Shareholding
Nagaraju provided important context about government shareholding in PSBs, noting that while the Union government's shareholding in 12 public sector banks has not declined in terms of number of shares since 2020, the percentage shareholding has reduced in some banks due to capital raising through fresh share issuance.
Public sector banks have collectively raised approximately Rs 45,000 crore through various mechanisms including:
- Qualified institutional placement (QIP)
- Offer for sale
- Other capital raising instruments
Looking ahead, banks are expected to mobilize about Rs 45,000-50,000 crore in the next financial year as well, aligning with their growth trajectory and expansion plans.
Growth Outlook and Asset Expansion
Providing an optimistic growth outlook, Nagaraju revealed that public sector banks are expected to double their asset size over the next five years. This projection comes as the combined assets of PSBs stood at about Rs 261 lakh crore at the end of September 2025, indicating substantial growth potential in the coming years.
IDBI Bank Disinvestment Progress
On the strategic disinvestment of IDBI Bank, the secretary indicated that financial bids are likely to be invited this month or next month. The disinvestment process has been progressing steadily since October 2022 when the government and LIC invited expressions of interest (EoI) from investors for privatisation through sale of a total 60.72 per cent stake.
The Department of Investment and Public Asset Management (DIPAM) received multiple EoIs in January 2023, and prospective buyers have already received security clearance from the Ministry of Home Affairs. Additionally, these potential investors have been declared fit and proper after thorough evaluation by the Reserve Bank of India.
Banking Sector Consolidation Vision
Addressing the broader banking landscape, Nagaraju emphasized India's need for larger banking institutions, stating "We need 3-4 big banks for a country of our size." This comment underscores the government's vision for sector consolidation and the creation of stronger, more competitive banking entities capable of supporting India's economic ambitions.
The proposed FDI limit increase represents a crucial component of this broader strategy, potentially enabling public sector banks to access greater international capital while maintaining government control and oversight. As consultations continue, this policy shift could significantly reshape India's banking sector and its ability to finance the country's growth aspirations.
