The government is considering raising the limit on foreign direct investment (FDI) in public sector banks to 49% from existing 20%, a senior government official said.

The move will attract foreign investors to Indian state-run banks while enhancing their capital base. It will also lead to the creation of big banks. 

"We are still considering, and inter-ministerial consultation is on for raising FDI cap to 49%," Financial Services Secretary M Nagaraju told reporters.

Indian private banks have recently attracted foreign interest, with Dubai-based Emirates NBD acquiring a 60% stake in RBL Bank for Rs 26,853 crore and Japan’s Sumitomo Mitsui Banking Corporation (SMBC) picking up 24.22% of Yes Bank for Rs 16,333 crore.

While the FDI limit in state-run banks is 20%, in case of private sector banks it is 74%, with up to 49% available through the automatic route. 

The government’s holding of the number of shares in the 12 public sector banks has not declined since 2020. But the percentage of its shareholding has declined in some of these banks due to the raising of capital through the issuance of fresh shares by banks.

Public sector banks are expected to launch qualified institutional placement (QIP) of shares worth about Rs 50,000 crore in FY27, more than the planned Rs 45,000 crore in the current fiscal year.

On the IDBI Bank strategic sale, Nagaraju said financial bids would be invited during this month or next month.

The government and state-owned Life Insurance Corporation of India (LIC) together plan to offload their 60.7% stake in IDBI. While the government owns 45.48% in IDBI Bank, insurance behemoth LIC holds 49.24% after rescuing the bank in 2019 when it was hit by a spike in bad loans.

As regards big banks, Nagaraju said the Indian economy of such size would need 3-4 big lenders, as they will be able to handle bigger risks and offer bigger loans.