Foreign banks find India growth story comes with strict entry conditions

While India offers one of the most compelling growth opportunities in coming decades, overseas bidders in the financial sector face tight voting caps, onerous processes and long payback timelines

By Siddhi Nayak

 

Global banks attracted to India’s nearly $4 trillion economy are discovering that access comes at a price: limited control, drawn-out returns and the need for unconventional deal structures. 

While India offers one of the most compelling growth opportunities in the coming decades, overseas bidders in the financial sector face tight voting caps, onerous processes and long payback timelines as they seek to get a foothold.

 

To pull off their expansion, Japan’s megabanks adopted different playbooks to get them through.

 

Mitsubishi UFJ Financial Group Inc. pivoted to target a non-banking firm because it wanted higher voting rights, according to people familiar with the matter. Sumitomo Mitsui Financial Group Inc. won its bid by agreeing to stay hands-off in day-to-day operations, other people said. Mizuho Financial Group Inc., meanwhile, laboured about four years in its pursuit of the KKR & Co.-backed Avendus Capital Pvt as it dealt with multiple stakeholders, one of the other people said.

 

 

MUFG and Mizuho declined to comment, while SMFG did not reply to a query from Bloomberg News.

 

The hurdles illustrate the trade-offs embedded in India’s financial-sector strategy, which is focusing on scaling up state-backed lenders to finance long-term growth even as it courts private and foreign capital. With Prime Minister Narendra Modi seeking to lift gross domestic product to about $30 trillion by 2047, the goal would require bank credit to more than double to roughly 130 per cent of GDP, from 56 per cent.

 

“Flexibility and patience for the long haul” is essential for these deals where regulations are evolving, said Manish Aggarwal, national leader for infrastructure, financial and strategic solutions at Deloitte India. 

 

Besides the large Japanese banks, Middle Eastern players have also been active. Emirates NBD Bank PJSC agreed to invest in India’s RBL Bank Ltd., while Abu Dhabi’s largest listed firm, International Holding Co. PJSC, acquired a significant stake in shadow lender Sammaan Capital Ltd.

 

With their deep pockets, the Japanese are strategic and are investing for a longer horizon in established franchises that span the full spectrum of India’s retail population, said Karan Gupta, head of financial institutions at India Ratings & Research. Likewise, Middle Eastern suitors seeking expansion outside their home markets have a stronger possibility to succeed compared with some US and European lenders, he added.

 

For the latter group, the approach of offering mortgages, personal loans and credit cards on their own has often faltered. 

 

Citigroup Inc. completed the sale of its Indian retail operations in 2023 as it retreated from markets where it lacked scale. Deutsche Bank AG is in talks to offload its retail business portfolio, while Standard Chartered Plc is reviewing its credit card unit.

 

With India considering to increase the foreign investment cap in state-run lenders to 49 per cent from 20 per cent, the opportunity to bank the world’s most populous nation appears stronger than ever. The limit in private sector banks is already higher at 74 per cent. Voting rights for a single large shareholder are capped at 26 per cent in the banks, restricting control even when economic ownership is larger.

 

Recent earnings from Indian lenders show robust lending growth, driven by rising consumption and supported by easing borrowing costs. Many banks have also reduced bad loans over recent years. 

 

In total, deals involving foreign investors in India’s financial sector were at a record $20.5 billion last year, according to data compiled by Bloomberg. This raises the bar for 2026 as fewer obvious targets remain and the buyers digest their acquisitions. India currently has 12 state-run banks and 21 large and mid-sized private lenders, along with thousands of shadow banks.

 

Buyers are expected to continue to look at non-banking financiers, drawn by faster growth prospects and voting control that’s in line with equity ownership, analysts said. Expanding into India’s wealth management market, one of the world’s fastest-growing, through acquisitions, is another key objective, as newcomers face an uphill task amid intense competition for assets and talent.

 

“The space for shadow lenders, small finance banks and medium-sized ones offers immense upside for foreign investors, given that there is more potential for scale in a sustainable manner,” said Vivek Ramji Iyer, partner at Grant Thornton Bharat. 

Investors for now are focusing on a divestment that could bring long-awaited clarity.

 

The government has received financial bids for its majority stake sale in IDBI Bank Ltd., which is worth roughly $8 billion at current market prices. A deal would cap a process that has stretched for several years after deadlines were repeatedly missed.

 

Fairfax Financial Holdings Ltd. is the frontrunner to buy the stake, people familiar with the matter said in February, in what could be the biggest foreign investment in the country’s banking industry. IDBI Bank, once burdened by bad loans, has emerged from a major cleanup and returned to profitability in recent years.

 

“It will turn out to be a test of how a full-fledged privatisation in the financial sector will play out,” said Kranthi Bathini, director of equity strategy at WealthMills Securities.