India's government is considering a significant policy change that would allow foreign investors to own up to 49% of public sector banks. This proposal would more than double the current foreign direct investment (FDI) limit of 20% in state-run lenders. The Finance Ministry has been discussing the matter with the Reserve Bank of India (RBI) for several months, aiming to attract more capital and align public bank regulations with those for private lenders.^{[1][2][3][4][5][6][7][8][9][10]} The plan remains under discussion and is not yet finalized.^{[1][2][3][4][5][6][7][8][9][10]} ### Boosting Capital and Aligning Rules The current foreign investment cap for public sector banks stands at 20%, requiring government approval.^{[1][2][3][4][6][7][11][8][9][12][10][13][14][15]} In contrast, private sector banks can have foreign ownership of up to 74%, with automatic approval for investments up to 49%.^{[1][2][3][4][5][6][7][8][9][10][14][15][16][17]} This proposed increase to 49% for public banks seeks to narrow this regulatory gap.^{[1][3][4][6][7][8][9][10]} Officials believe the move will help state-run banks access more capital and strengthen their financial health.^{[3][5][6][8][13]} India has 12 state-owned banks, holding combined assets of about $1.95 trillion as of March, representing 55% of the nation's banking sector.^[2][8] Despite their significant presence, these banks often lag behind private peers in profitability and operational efficiency.^[5][9] Foreign investors currently hold relatively small stakes in public sector banks, ranging from about 12% in Canara Bank to nearly zero in UCO Bank, according to September-end stock exchange data.^{[1][3][8][18][9][10]} Raising the foreign ownership limit could reduce these banks' dependence on government capital injections.^[5] ### Government to Retain Majority Control Even with the proposed increase in foreign investment, the Indian government intends to maintain majority ownership. It plans to retain at least a 51% stake in all public sector banks.^{[1][2][5][6][7][11][8][18][9][19][13]} This ensures the government keeps control and preserves the public sector identity of these institutions. Sources familiar with the discussions indicate that safeguards, such as a 10% cap on voting rights for any single shareholder, are likely to remain in place.^{[3][4][5][6][8][10]} This measure aims to prevent any single foreign entity from gaining arbitrary control or influencing major decisions.^{[3][4][5][6][8][10]} The potential reform is part of a broader agenda to boost efficiency, improve governance, and support India's growing credit needs.^[5] Analysts suggest that higher foreign participation could also bring global expertise and technology to public banks.^{[5][6][13][14][15]} This could enhance their competitiveness against private lenders.^[13] ### Surging Foreign Interest in Indian Banking India's robust economic growth, averaging 8% over the past three fiscal years, has fueled rising demand for credit.^{[4][8][9][10][20]} This makes the country's banking sector increasingly attractive to foreign investors.^{[4][8][9][10][20]} In the first nine months of 2025, M&A deals in India's financial sector jumped 127% to $8 billion.^{[1][4][8][9][10]} Foreign portfolio inflows into Indian banks and non-banking financial companies (NBFCs) exceeded $12 billion in fiscal year 2025, marking the highest in a decade.^[20] Recent notable foreign investments include Dubai-based Emirates NBD's $3 billion acquisition of a 60% stake in RBL Bank.^[2][4][8][9] Japan's Sumitomo Mitsui Banking Corporation also acquired a 20% stake in Yes Bank for $1.6 billion, later increasing its holding.^[2][4][8][9] These deals highlight the growing global confidence in India's financial market. Following reports of the proposed FDI cap increase, the Nifty PSU Bank index rose significantly, reflecting renewed investor optimism in the public banking space.^{[1][4][8][18][10][13]} The Finance Ministry and RBI continue their deliberations on this proposal. A final decision is expected to shape the future capital structure and operational landscape of India's public sector banking system.