KOCHI: Fitch Ratings on Tuesday said Sumitomo Mitsui Financial Group’s (SMFG) move to acquire a 20 per cent stake in Yes Bank could mark a turning point for foreign investors in India’s banking sector.
The rating agency noted that the deal, subject to regulatory approval, could set a precedent and attract more foreign investors to explore strategic stakes in Indian banks – particularly mid-sized ones.
Fitch also pointed out that India’s foreign investment rules, which cap voting rights at 26 per cent and restrict investments by financial institutions in Indian banks to 15 per cent, have historically deterred such deals.
However, SMFG’s acquisition — which makes it the largest shareholder in Yes Bank with two board seats — signals regulatory openness to foreign control, at least in deserving cases.
The Rs13,480 crore deal, announced on May 9, involves SMFG acquiring the stake from existing shareholders, including the State Bank of India (SBI) and other domestic banks that had supported Yes Bank’s rescue in 2020.
Fitch said the transaction reflects Yes Bank’s recovery from its earlier stress and may inspire similar interest from foreign players, especially those with strong governance and performance track records.
Foreign banks leading stake acquisitions
Fitch’s comments follow a pattern already visible in India’s banking space – whenever a sizable chunk of a bank’s shares is put on the block, it’s often a foreign suitor that steps in.
Fairfax Holdings took over Catholic Syrian Bank (now CSB Bank). DBS of Singapore absorbed Lakshmi Vilas Bank (LVB) during its collapse. Now, Japan’s SMFG is moving into Yes Bank.
Even in the case of IDBI Bank, where the government is looking to dilute its stake, two prominent suitors are foreign players: Fairfax and Emirates NBD.
This trend raises an important question – why aren’t large Indian financial institutions equally aggressive in snapping up bank stakes?
15% conundrum – and regulatory asymmetry
A key factor may lie in the 15 per cent cap on shareholding for non-promoter entities. While this threshold exists for both foreign and Indian investors, the RBI has shown greater flexibility in foreign cases – especially when the investment helps revive or stabilise a bank.
Interestingly, there is no known precedent of an Indian institution being formally denied permission to exceed the 15 per cent mark. But that may be because few have applied in the first place.
Informal signals or regulatory hesitation may have discouraged applications even before they were filed. This has created an asymmetry: foreign banks with solid governance and a long-term approach appear to get more leeway – particularly in distress cases – while Indian players often find the door less open unless they are designated promoters.
LIC’s takeover of IDBI Bank was one exception, but that required a full regulatory reclassification of IDBI as a public sector bank and LIC as a promoter – hardly a replicable model.
RBI’s caution around domestic conglomerates
The RBI has long expressed discomfort with the idea of large Indian conglomerates or NBFCs taking control of banks, citing risks around related-party lending and governance.
Its 2020 internal working group explicitly recommended against allowing business houses to set up banks – a signal that Indian financial groups, even if eligible, would face more scrutiny than foreign peers operating through ring-fenced subsidiaries.
Will RBI relax norms for Indian investors too?
The emerging pattern suggests a policy rethink might be due. If India wants to build scale in its private banking sector while maintaining stability, there may be merit in the RBI explicitly stating that the 15 per cent ceiling can be relaxed – even for Indian institutions – in deserving cases.
That clarity could unleash domestic capital and level the playing field with foreign entities.
Until then, it seems likely that foreign banks will continue to play the lead role in reshaping India’s mid-sized banking landscape – especially in high-stakes rescue or restructuring situations.
