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investment in indian banks

India protected its banking sector from deep foreign interference for decades. But now Indian banks are attracting a flood of international capital. Despite the slowdown in overall FDI, global interest in Indian financial institutions remains strong. Data compiled by Bloomberg show that deals worth nearly $15 billion have been struck this year alone, signaling a new era of confidence in India's financial capability.

From Dubai's Emirates NBD and Japan's Sumitomo Mitsui Banking Corporation to America's Blackstone and Switzerland's Zurich Insurance, a diverse mix of global players are investing heavily in Indian banks, insurance companies and non-banking financial companies (NBFCs). The latest is the announcement of a $705 million investment by Blackstone for a 9.9% stake in Federal Bank, becoming its largest shareholder. This influx of foreign capital signals a long-term strategic commitment to one of the world's fastest growing and digitally connected economies.

Why are Indian banks attraction centers for foreign capital?

According to an ET report, global investors are being attracted to India for reasons that go beyond short-term opportunities. Indian economy remains the fastest growing major economy due to increasing consumption, rapid urbanization and flourishing digital ecosystem. The formal financial system is now reflecting this growth and loan demand in the retail housing and small business sectors is increasing rapidly.

Despite this momentum, banking penetration in India remains largely lacking. A large part of its population and small enterprises depend on informal lending sources. For foreign investors, this under-penetration is a big opportunity. It will take decades to build a nationwide financial presence. Acquiring stakes in established banks and NBFCs provides instant access to customer base, regulatory licenses and distribution networks.

Vivek Ramji Iyer, partner and head of financial services practices at Grant Thornton India, recently told Bloomberg that geopolitical risks have increased financial and supply chain risks and foreign investors are looking for better prospects in countries that minimize them. India's domestic focus and low correlation with the global economy make it an attractive entry point. For Indian banks and NBFCs, the influx of foreign capital brings critical capital at a time when expansion demand is high and for the overall financial ecosystem, these deals boost competition, governance standards and innovation.

Will investment in public sector banks increase?

The influx of foreign capital may also turn towards Public Sector Banks (PSBs). Last month, ET had reported, based on unsourced information, that the government is considering increasing the foreign investment limit in public banks from the current 20% as it wants to strengthen them as institutions that can easily raise capital. This is one of several proposals that policymakers are discussing as part of broader reforms planned to boost the economy amid geopolitical concerns. A senior government official told ET that the government will not reduce its stake below 51%, while the public character of these banks will be secured by increasing the foreign stake.