Foreign banks may be allowed to own 26% stake in Indian banks, up from the current regulatory cap of 15%.

Reserve Bank of India Governor Sanjay Malhotra said the regulator will review if foreign banks could be allowed to own 26% stake in local banks as a general matter of policy.  

The central bank has allowed such acquisitions in the past on a case-to-case basis and only in distressed bank takeovers. DBS Bank’s India unit, for example, was permitted to acquire Lakshmi Vilas Bank. 

Under the current regulation, foreign investors, including portfolio investors, can own up to 74% in Indian banks. However, a single foreign entity’s holding is capped at 15% unless the RBI grants permission on a case-to-case basis. Upon request, the RBI can review and allow higher ownership as it did in the case of Fairfax, which was allowed to acquire a 51% in CSB Bank (formerly Catholic Syrian Bank).

While these rules prevent concentration of ownership control by one player, it can act as an obstacle to more deals in the banking sector. Now the RBI is reviewing whether a more open policy will be more conducive instead of having a case-by-case approach.

“We’ve not received any case where a foreign bank wants to own 26% of Indian banks. But if they come, we are already reviewing the policy,” Malhotra said in an interview to CNBC-TV18. 

Malhotra’s comment comes in the wake of foreign banks showing more interest in acquiring considerable stakes in Indian banks, such as Sumitomo Mitsui Banking Corp (SMBC) in Yes Bank and Emirates NBD in RBL Bank.

On whether allowing business conglomerates to own banks, Malhotra said “conducting financial business and real economic activities within the same group has conflict of interest”.