Foreign investment in India’s commercial banks, including the sector’s largest-ever cross-border deal, helped the country’s banking M&A record the largest year-to-date deal volume in three years and the highest number of transactions since 2020.

India’s bank sector has seen eight transactions YTD worth USD 2.5bn – up 14.7x compared to the prior year period. The dollar value of M&A is dominated by two stake sales by Yes Bank and IDFC First Bank that attracted interest from foreign players keen to gain greater exposure to the country’s fast-growing economy.

Sumitomo Mitsui Financial Group (SMFG)’s USD 1.58bn acquisition of a 20% stake in Yes Bank marks India’s largest cross-border banking deal as well as the first major Japanese entry into India’s private commercial banking sector. Another headline-grabbing transaction was the sale of a 14.6% stake in IDFC First Bank to US private equity firm Warburg Pincus and Abu Dhabi Investment Authority (ADIA) for USD 877.5m.

Foreigners are also eyeing the acquisition of a majority stake in state-owned IDBI Bank, with the Indian government planning to invite bids between October and December. The 61% stake sale is expected to be worth around USD 5bn.

This level of cross-border activity in the sector is unusual. Before this year, the most recent significant inbound sector deal was the full takeover of troubled Indian lender Lakshmi Vilas Bank by Singapore-based DBS Group in 2020.

Following their expansion in Southeast Asia and the US, Japanese megabanks like Sumitomo Mitsui Financial Group (SMFG), Mitsubishi UFJ Financial Group (MUFG) and Mizuho Financial Group are among those international players who are turning to India for high return strategic opportunities.

India’s bank sector is viewed as one ideal home for some of the billions of dollars the cash-rich Japanese lenders are raising from the unwinding of domestic cross-shareholdings as part of government-backed corporate governance reforms initiated in recent years.

India caps foreign ambitions

Indian authorities are seeking to strike a balance in attracting foreign capital into its banking sector while preserving financial stability and public policy through foreign investment caps for private sector banks, according to Parina Muchhala, Senior Member, M&A and Private Equity Practice, at Nishith Desai Associates.

Foreign ownership in Indian banks is tightly regulated with a 74% cap on private sector lenders, although the Reserve Bank of India (RBI) is considering allowing overseas players hold larger stakes. Regulations in India also impose a 26% cap on voting rights and mandate that the largest shareholder of a local bank, termed as ‘promoter’, must their reduce shareholding to 26% over a 15-year period.

In addition, foreign banks need a significant amount of branch network, distribution and franchise to survive in the fiercely competitive Indian banking sector, and the threat of Donald Trump’s tariffs could have some indirect impact on the valuation of Indian lenders.

Privately-owned banks are generally more attractive for foreign buyers than public sector banks due to cleaner balance sheets, stronger governance standards and digital capabilities, higher operating efficiency, and greater strategic flexibility post-acquisition, Muchhala said.

Nonetheless, the planned sale of state-owned IDBI Bank has picked interest from overseas players including Canada’s Fairfax Financial Holdings and Dubai’s government-owned Emirates NBD, with the latter emerging as the frontrunner.

Although smaller domestic players might survive intense competition by carving out niche markets, Indian largest banks will also continue to play a key role in the consolidation of the sector. Among others, Kotak Mahindra Bank is vying with foreign players in bidding for a majority stake in IDBI Bank.

In 2023, HDFC Bank, India’s largest private lender, merged with parent Housing Development Finance Corp in July 2023. The same year, Axis Bank completed a deal to buy Citigroup’s local consumer and non-banking finance businesses for INR 116.03bn (USD 1.41bn).

State-owned banks for sale

Meanwhile, the Indian government is expediting its disinvestment program across public sector banks (PSBs) to raise capital and meet regulatory norms. The Securities and Exchange Board of India (SEBI) requires a minimum 25% public shareholding by August 2026. In addition, authorities are initiating stake sales in state-run lenders as a way to improve governance and market efficiency.

The Modi administration is seeking to fast-track the sale of up to 20% stake in five public sector banks – UCO Bank, Bank of Maharashtra, Central Bank of India, Punjab & Sind Bank, and Indian Overseas Bank (IOB).

The stake sales will be conducted through Qualified Institutional Placements (QIP) – which aims to attract registered institutional buyer – as well as through the Offer for Sale (OFS) route, which is enabled through stock exchanges with greater market visibility.

Indian state-run banks are planning QIPs to raise INR 450bn (USD 5.25bn) in FY 25-26, with State Bank of India (SBI) alone having secured the finance ministry approval to raise INR 200bn through QIP. SBI raised INR 25bn through a QIP last month.

Not only public sector banks are in fundraising mode. Embattled IndusInd Bank, a lender backed by Indian conglomerate Hinduja Group, said in July it plans to raise up to INR 300bn (USD 3.42bn) via debt, ADR, GDR and QIP.

The Indian government also ordered state-owned banks to divest non-core assets outside their commercial banking business through trade sales or IPOs.

Among others, State Bank of India, the country’s largest lender, is likely to consider listing its two major subsidiaries, SBI General Insurance and SBI Payment Services, while Canara Bank initiated the process of listing its asset management joint venture, Canara Robeco AMC.