Over the years, the RBI has moved from a cautious stance on FDI in commercial banking, to a pragmatic, case-by-case liberalisation that allows for higher foreign stakes. In this post, Sunil Mani examines this evolution, highlighting case studies that demonstrate the role of FDI in driving growth and efficiency. However, he notes that the growing dominance of private banks, which focus on affluent clients, raises concerns about equitable access to banking.

The Reserve Bank of India (RBI) has historically prioritised financial stability in regulating foreign direct investment (FDI) in Indian commercial banks, adopting a cautious approach distinct from other sectors, such as manufacturing, where 100% FDI is often permitted. This strategy insulated Indian banks during the 2008 Global Financial Crisis. However, by 2025, the RBI had shifted to a more calibrated approach, selectively allowing higher foreign stakes to balance recapitalisation and modernisation with risk mitigation. In this post, I argue that this evolution fosters economic growth while maintaining regulatory control, reflecting a cautious shift rather than a fundamental policy overhaul. However, it raises concerns about equitable banking access due to the focus on affluent clients and the dominance of private banks.

The RBI's cautious legacy and sectoral distinction

The RBI's cautious approach to FDI in banking stems from the sector's systemic importance, aiming to shield India's financial system from volatile global capital flows. This was evident during the 2008 crisis, when limited foreign exposure prevented systemic failures seen in advanced economies. Unlike sectors like retail, where automatic FDI is less restricted, banking faces stringent caps. The statutory FDI limit for private banks is 74%, but individual non-promoter foreign ownership is capped at 15%¹. Stakes above 5% require prior approval. Majority ownership (beyond 15%) is permitted only in exceptional cases, such as recapitalisation or supervisory intervention, with voting rights capped at 26% to ensure domestic control. In 2008, effective limits were even tighter (5% for individuals, 10% for institutions), reflecting a defensive stance aimed at protecting banks from speculative capital.

Evolution of FDI policy: From conservatism to pragmatism

The RBI's FDI policy has evolved significantly. Between 2001 and 2004, FDI was liberalised to allow 49% through the automatic route, with the overall cap raised to 74% in 2004 (including FDI, FII (foreign institutional investment), NRI (non-resident Indian), and other categories). Single-investor limits persisted, with non-resident shareholders capped at 10% (extendable to 15% with approval) by 2013. A notable exception was Fairfax India Holdings Corporation's 51% stake in Catholic Syrian Bank (now CSB Bank Ltd.) in 2018-2019, approved to recapitalise a financially weak bank with a five-year lock-in. By 2025, the RBI's calibrated pragmatism permits higher stakes on a case-by-case basis, as seen in Japan's Sumitomo Mitsui Banking Corporation (SMBC) acquiring 24.99% in Yes Bank without promoter status. This shift, contrasting with 2008's risk-averse stance, recognises foreign capital as a strategic resource for recapitalisation and growth, balanced by rigorous regulatory oversight.

I undertake a case study² of foreign investments in CSB Ltd. as the Fairfax-led FDI in CSB Bank represents a rare, regulatory-approved exception in India's banking sector, directly illustrating the shift from a defensive policy to a pragmatic, case-by-case liberalisation. This analysis provides concrete evidence of how foreign capital can potentially drive bank recapitalisation and modernisation, clarifying the broader policy transition through a specific institutional outcome.

Case study: CSB Bank's turnaround

Fairfax's acquisition transformed CSB Bank, demonstrating FDI's impact. From 2020-21 to 2024-25, total income grew from Rs. 2,285 crore to Rs. 4,569 crore, driven by substantial net interest income and a 66% year-on-year rise in non-interest income. Profit after tax rose from Rs. 459 crore to Rs. 594 crore, with a 26% quarterly increase to Rs. 190 crore in Q4 2024-25. Asset quality improved, with net non-performing assets (NPAs) falling from 0.68% to 0.52%, supported by an 86.38% provision coverage ratio³. Balance sheet expansion was significant: deposits grew from Rs. 20,188 crore to Rs. 36,861 crore, advances from Rs. 16,742 crore to Rs. 31,842 crore, and total assets reached Rs. 47,836 crore (33% year-on-year growth). Efficiency metrics include a 62.82% cost-to-income ratio and 24.47% capital adequacy ratio. These gains, driven by recapitalisation, a focus on retail, SME (small and medium enterprises), and gold loans (42% of the portfolio), as well as digital enhancements, highlight FDI's role in modernisation.

Comparatively, public sector undertaking (PSU) banks, supported by government recapitalisation, reported aggregate net profits exceeding Rs. 1.4 lakh crore by 2024-25, with the State Bank of India contributing approximately Rs. 50,000 crore. Private banks, such as Kotak Mahindra, which are similar in scale to CSB, posted profits of approximately Rs. 13,000 crore. PSU banks' reliance on domestic support reduces their need for foreign capital; however, CSB's rapid turnaround underscores the unique contribution of FDI to private bank modernisation.

Private banks' dominance and policy implications

Private banks, such as HDFC, ICICI, and Axis, with foreign institutional investment of 40-55% as of 2025, remain Indian-controlled due to the RBI's 26% voting cap. Axis Bank's foreign holding is approximately 50-55%, comparable to HDFC (pre-merger) and ICICI, yet all are subject to domestic management. These banks account for 35-40% of banking assets and deposits, reflecting private sector dominance. Unlike PSU banks, private banks are less obligated to support social schemes, such as Jan Dhan accounts⁴ or low minimum balance requirements, and instead focus on affluent clients. However, they participate in government schemes (for example, PM Mudra Yojana⁵) for fee-based income, suggesting a policy bias favouring large private banks. This raises concerns about equitable banking access, as public policy appears to prioritise profitability over inclusivity, potentially exacerbating financial inequality.

IDBI and strategic investment

Speculative bids by Fairfax and Emirates NBD for IDBI (Industrial Development Bank of India), though unconfirmed by mid-2025, signal global interest. IDBI's recovery, supported by LIC's (Life Insurance Corporation) 25% stake since 2019, includes profits of approximately Rs. 5,000 crore and NPAs below 1% by 2024-25. A foreign partner could provide capital and expertise for digital banking and SME lending, aligning with RBI's modernisation goals. Alternatively, making IDBI an LIC subsidiary could consolidate domestic control, leveraging LIC's financial strength. The RBI's case-by-case approach balances these options to ensure stability and competitiveness.

Policy framework and global interest

On 6 June 2025, Governor Sanjay Malhotra reaffirmed the 15% cap but announced a review of ownership structures to address capital and governance needs. This approach fosters recapitalisation and competition, but prioritises affluent clients, which risks creating inequality. The benefits of FDI include capital infusion (for example, CSB's 33% asset growth), knowledge transfer, and support for economic growth, as noted by Malhotra. Risks include systemic vulnerabilities stemming from volatile capital flows, the potential loss of domestic control (mitigated by voting caps), and regulatory challenges in maintaining investor credibility. The Financial Times notes India's "slowly opening" banking sector, with SMBC's (Sumitomo Mitsui Banking Corporation) stake in Yes Bank and IDBI's bids underscoring global interest driven by India's growing financial market.

Dual structure of FDI governance

A related proposition is that investments by foreign banks in India are more a matter of political concern for the Ministry of Finance than an RBI decision. The Ministry of Finance, through the DPIIT (Department for Promotion of Industry and Internal Trade), sets sectoral FDI caps as a matter of policy, reflecting broader political economy considerations. However, the RBI retains ultimate regulatory authority over individual transactions, including case-by-case approvals, fit-and-proper assessments, and prudential conditions such as lock-in periods or limits on voting rights. The Fairfax-CSB Bank and SMBC-Yes Bank cases illustrate how, even within the policy framework established by the Ministry, the RBI exercises decisive discretion. Therefore, foreign bank investments in India result from a dual structure: political signals and statutory ceilings set by the finance ministry, and operational gatekeeping by the RBI.

Towards gradual liberalisation?

The RBI's approach does not signal immediate moves towards full capital account convertibility⁶ which requires stronger bank balance sheets, developed bond markets, stable macroeconomic conditions, and resilient institutions. The current policy, described as a "gradual change”, uses strategic exceptions to attract high-quality capital while maintaining statutory caps. This domestically-oriented FDI, aligned with liberalisation in services such as accounting, strengthens banks but risks neglecting underserved segments.

Conclusion

The RBI's shift from the defensiveness of 2008 to the pragmatism of 2025 balances opportunity and caution, fostering modernisation while ensuring stability. The contrast – between 2008's tight limits and 2025's selective openness – reflects a strategic evolution. However, private bank dominance and focus on affluent clients raise equity concerns. Full capital account convertibility remains distant, but the RBI's cautious approach, while desirable for growth, must address inclusivity to ensure broad-based financial development.

The views expressed in this post are solely those of the author and do not necessarily reflect those of the I4I Editorial Board.

Notes:

1. This means that foreign investors can collectively own up to 74% of a private bank in India, but any single foreign investor (not part of the promoter group) cannot hold more than 15% of the bank’s shares. 
2. The case study is based on two CSB Bank documents, CSB (2025) and CSB (various years).
3. The Provision Coverage Ratio (PCR) in banking measures the proportion of a bank’s non-performing assets (NPAs) for which it has made provisions to cover potential losses.
4. Jan Dhan Accounts are no-frills savings accounts launched in 2014 to bring unbanked people into India’s formal banking system, promoting financial inclusion.
5. The Pradhan Mantri Mudra Yojana (PMMY) is an Indian government scheme launched in 2015 to provide financial support to small and micro enterprises that traditional banks do not adequately serve.
6. In other words, India will continue to maintain specific controls on capital account transactions, such as limits on how much money residents can invest abroad or how freely foreigners can move capital in and out of the country.