The Reserve Bank of India (RBI) is examining measures to allow international investors to own more of Indian banks, as foreign companies show greater interest in acquiring Indian banks.

It comes soon after the RBI allowed Japan’s Sumitomo Mitsui Banking Corp to invest in Yes Bank as a minority stakeholder. Having more ownership can be approved for foreign companies if the case calls for it. Because of the rise in Indian exports and trade agreements, foreign Asian and Middle Eastern banks suddenly see more opportunities, so the RBI is assessing and possibly relaxing its rules on bank establishment in the country.

"The interest is driven by India's strong economic growth and large under-penetrated market," said Madhav Nair, deputy chairman of the Indian Banks Association. 

Indian regulators, for their part, worry that India lags other large economies in mobilising banking capital, which will be vital to sustaining rapid economic growth. Alka Anbarasu, associate managing director at Moody's Investors Service, said India will need much more capital for its banking system over the medium term. 

• RBI is reviewing rules to allow greater foreign stakes in Indian banks, following Sumitomo Mitsui’s $1.58B Yes Bank deal.
• Strategic investors may receive case-based exemptions from current 15% stake and 26% voting rights limits.
• Foreign interest is rising due to India's strong growth and under-penetrated banking market, with firms like Fairfax and Emirates NBD eyeing IDBI Bank.

"Whether this has prompted the regulator to consider bringing in strong international players into the banking system, it would be a good rationale for doing so," she said. 

Citibank, HSBC and Standard Chartered are foreign banks in India that chiefly offer services to corporations and handle financial transactions, but do little in retail lending. Though Indian laws allow 74 percent foreign investment in banks, a strategic investor can hold a maximum of 15 percent and may not vote more than 26 percent on decisions and must reduce his/her own interests to 26 percent within the period of 15 years. This above-mentioned regulation has turned India’s banking sector into one of the most controlled and regulated.

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In contrast, the Reserve Bank of India (RBI) is now being flexible, mainly because of the $1.58 billion stake purchase by Japan’s Sumitomo Mitsui in Yes Bank which is the country’s largest financial sector transaction with another nation. The RBI may look into longer assessment periods for stake dilution and allowing exceptions in each case.

More firms are paying attention to Indian banks, as Fairfax from Canada and Emirates NBD are both interested in a stake of over 60 percent in IDBI Bank. Emirates NBD was allowed to form an Indian branch which points to its determination to remain committed in the long term. Ratings agency Fitch points out that changing the current 15 percent and 26 percent limits would encourage more foreign investment. Even though the voting rights limit would require a law to change, the RBI might consider allowing foreign strategic investors as there aren’t many interested Indians in owning banks.