FDI in banking: India’s financial sector is in an unusual moment: rare, control-seeking deals by foreign players are arriving alongside large bets by global private capital. Emirates NBD’s agreement to acquire 60% of RBL Bank for about $3 billion — the largest cross-border acquisition in Indian banking — caps a year that also saw SMBC agree to buy 20% of Yes Bank, IHC take 43.5% of Sammaan Capital (ex-Indiabulls Housing), Warburg Pincus and ADIA inject $877 million into IDFC FIRST Bank, and Bain Capital move toward joint control of Manappuram Finance through an 18% stake and open offer.
The policy question is straightforward: how should India design FDI and investment rules for banks and NBFCs so that fresh capital and technology transfer are welcomed, competition is sharpened, and systemic stability is not compromised?
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India allows consolidated foreign investment up to 74% in private banks, yet the Reserve Bank of India typically caps any single non-resident shareholder at 15% unless granted a specific exemption. The Emirates NBD–RBL Bank transaction will test how the RBI applies that discretion in practice at scale. Insurance has already moved to a 74% FDI cap, and the government’s broader stance has been to liberalise sectoral limits where feasible. For foreign banks, the 2013 framework encourages operation through a locally incorporated, ring-fenced wholly owned subsidiary (WOS) to ensure robust home-host supervision, local capitalisation, and orderly resolution if stress hits the parent.
That prudential logic remains sound. What needs upgrading is predictability around “control”: clear thresholds for board rights, vetoes, and the merger of local subsidiaries into acquired banks, so strategic investors know what they may build—and regulators keep sight of ultimate accountability.
More competition through FDI in banking
The academic literature is broadly supportive of foreign bank entry: competition tends to improve, new risk-management practices arrive, and product diversity expands. The benefits are not automatic. Some studies associate rapid foreign entry with higher risk-taking in certain environments, highlighting the need for strong local supervision and fit-and-proper norms. India’s governance toolkit is stronger today than a decade ago: tenure caps for bank CEOs, tighter related-party rules, and upgraded board independence norms are in place.
Readiness for integration challenges remains uneven. When a strategic takes 20–60%, culture, credit processes, technology stacks, and conduct standards must converge. The RBI should require time-bound post-deal integration plans—covering core-banking migration, credit models, third-party risk, data localisation, cyber resilience, and consumer outcomes—with board-level accountability and external validation.
Competition, consumer protection, and inclusion
More foreign capital will intensify rivalry across retail and MSME lending, payments, and wealth — good for prices and service quality if the market remains contestable and switching is easy. The Competition Commission’s refreshed combination regime provides a contemporary lens, but sector regulators must continually monitor conduct in data-rich markets where digital distribution and embedded finance can create gatekeeper advantages.
Consumer protection is the second leg of the triangle. India’s Integrated Ombudsman Scheme has moved the system toward a “one nation, one ombudsman” approach and is being strengthened further, including wider coverage and tighter timelines. The test is outcomes, not process: complaint rates should fall relative to the customer base; mis-selling and fee-shrouding should decline; and vulnerable customers should receive fair forbearance in stress.
Financial inclusion completes the triangle. India’s FI-Index rose to 67 in March 2025, reflecting steady gains in access, usage and quality, aided by UPI scaling to nearly 20 billion monthly transactions in September. New foreign owners should be held to hard inclusion deliverables: targets for underserved districts, vernacular customer support, grievance-redress SLAs, and transparent pricing for small borrowers. The licence to grow must be matched by obligations to serve, especially in semi-urban and rural India.
India’s financial system enters this cycle from a position of resilience: bank and NBFC balance sheets are stronger and stress buffers larger, as the RBI’s June 2025 Financial Stability Report highlighted. Global risks, however, remain elevated, with the IMF warning about stretched valuations, sovereign-bond pressures and the growing systemic footprint of non-banks.
Policy should therefore bind large foreign shareholdings to clear guardrails: local capital adequacy buffers above minimums during integration; credible recovery and resolution plans at the acquired entity; explicit home–host supervisory colleges for systemically important parents; strict ring-fences on related-party exposures and intragroup guarantees; and stress tests that model parent-level shocks, FX funding squeezes, and cyber cascade scenarios. The 2013 WOS principle—local resolution for local liabilities—should anchor these rules.
Deal flow is clearly up: in 2025, cross-border financial-sector transactions accelerated, culminating in the RBL control deal and a series of large NBFC and bank investments. Some drivers look structural: cleaner bank books after the NPA cycle; digital public rails (UPI, account aggregators) that lower distribution costs; and a deepening capital market that values operating control. Others look cyclical: a global search for yield, Japan’s low-rate outbound push, and oil-surplus capital from the Gulf seeking growth exposure. The right reading is “both”: structural reforms have made the street investable, but the global cycle is amplifying flows. That argues for rules that are stable across cycles, not permissive in booms and restrictive in busts.
A balanced policy design
Policy should be framed as “access with accountability.” For any stake above a meaningful threshold—20% is a pragmatic marker—approvals ought to be linked to a dated integration blueprint that covers technology migration, risk governance, conduct standards, data localisation and cyber resilience, and measurable inclusion commitments. Step-up acquisitions should be permitted only after milestones are verified by independent assurance. Clarity on control is the second pillar: codified thresholds that align board rights and vetoes with “change in control” tests, and harmonisation between RBI approval triggers and CCI combination filings, would reduce friction and forum shopping while improving regulatory certainty.
Consumer outcomes must be placed at the heart of competition. The RBI and sectoral regulators can publish comparable dashboards—complaint incidence per thousand customers, mis-selling flags, effective APRs on small-ticket credit, and grievance resolution times—so that rivalry is about quality as much as price, and consumers can vote with their feet.
Inclusion will be the fourth test. Rapid approvals for products and branch expansion should be tied to credible plans for underserved districts, MSME credit pipelines, and vernacular support, measured against the trajectory of the Financial Inclusion Index. Finally, stability must remain the first principle. The WOS ring-fence should stay intact; host-country capital and recovery plans should be mandatory; and stress tests must reflect the IMF’s evolving risk map, including parent-shock transmission through intragroup exposures and cross-border funding.
The destination. India should welcome strategic capital and technology from reputable foreign owners who commit to local governance and inclusive growth. The next few transactions will set the norm. If policy delivers clarity on control, rigour on integration, toughness on consumer outcomes, and prudence on stability, the sector can gain the best of both worlds: deeper balance sheets and better products—without importing fragility.