Exclusive: Govt wraps up inter-ministerial consultations on raising FDI limit in PSBs; Cabinet note soon

The government has concluded inter-ministerial consultations on a proposal to significantly raise the foreign direct investment (FDI) limit in state-run banks, people familiar with the development told Business Today TV. A cabinet note is expected to be floated by the ministry of finance shortly, potentially within this financial year, marking a decisive step towards opening up public sector banks (PSBs) to greater overseas capital.

While the move may not be announced in the Union Budget, sources said it could be taken up for Cabinet consideration even before the budget is presented. The proposal under discussion seeks to raise the foreign ownership cap in government-owned banks to as much as 49%, from the current limit of 20%, while ensuring the government retains a minimum 51% stake.

The push is driven by an urgent need to make PSBs globally competitive, strengthen governance standards, and enhance operational resilience at a time when credit demand is rising sharply across the economy. Policymakers believe greater foreign participation would also help improve market valuations of state-run lenders, which continue to trade at a discount to private peers despite improvements in asset quality and balance sheets.

India has 12 public sector banks that together account for more than half of the country’s banking assets. While these banks play a critical role in financial inclusion and credit delivery to priority sectors, they have historically faced challenges such as weaker returns on equity and higher exposure to stressed assets. The government now wants PSBs to emerge as sectoral champions across both traditional industries and emerging areas, including infrastructure financing, manufacturing, and green energy.

Foreign investor interest in India’s banking sector has strengthened in recent months, supported by robust economic growth averaging about 8% over the past three fiscal years and a surge in deal activity in financial services. Private lenders are already permitted to have foreign ownership of up to 74%, and officials see the proposed changes as a way to narrow the regulatory gap between private and government-owned banks.

Safeguards are expected to remain in place. These include caps on voting rights for individual shareholders to prevent concentration of control and ensure stability in decision-making. The Reserve Bank of India has been consulted as part of the process, given its role as the sector regulator.