Foreign interest in India’s banking sector is quietly rising, led by investors from Japan and the Middle East taking strategic stakes in lenders like RBL Bank and Yes Bank. Yet, banking veterans Zarin Daruwala, Former MD & CEO of Standard Chartered Bank and Srinivasan Varadarajan, Banking Veteran and Market Expert, believe this will be a “trickle, not a flood.”They note that while small and mid-sized banks may attract selective foreign capital, the real transformation could come from the RBI’s new M&A lending norms, which open fresh opportunities for banks — though with clear limits and measured expectations.Below are the edited excerpts from the interview.
Q: We saw Standard Chartered and Citi actually reduce their businesses in India, but now we have two banks from different geographies — Japan and the Middle East — coming in to buy huge stakes in small Indian banks. Do you think we will see more of this?Daruwala: I don’t think Standard Chartered reduced its business in India. Let me clarify — the bank globally decided to exit unsecured lending, and that was a global decision. Otherwise, very much a very large presence here.Regarding your question about SMBC and NBD, will more foreign banks buy? Yes, absolutely. I feel banking is a good barometer for the Indian economy, and we will see a lot of the smaller private sector banks that need more capital certainly looking at this option.Also, I think the segment that will see more attention in a few years is the small finance banks. Clearly, there could be some consolidation in that segment. The last two or three deals are also a reflection of the strong geopolitical relationships in the India–Japan and UAE–India corridors, along with the overall business momentum. These relationships will strengthen, helping these banks grow their businesses in India.I feel there will be a trickle of strategic stakes — not a flood.Q: On one hand, there’s foreign interest — which will, of course, have to go through the voting rights issue as well — but separately, how many Indian promoters will be willing sellers? I’m only referring to banks now. Will they be willing to give up a strategic stake?Varadarajan: If you look at the shareholding of banks, the RBI tries to ensure a diversified shareholder base, and to that extent, you don’t have any large shareholders in most banks, barring a couple.Also Read: RBI’s M&A lending push won’t shake up private credit just yet, says GreenEdges’ Digant HariaSo, most of these banks are professionally run, which creates an opportunity for a financial or strategic investor to take a reasonably large chunk—roughly 10%. In some cases, as we are seeing, where the RBI is slightly more liberal, a controlling stake is also possible.I don’t think any sponsors are actively looking to sell. It’s just that banks clearly need more capital, and that can be met through incremental issuance to existing or domestic investors. But if a strategic investor with deep pockets comes in, it’s useful for the bank’s growth, and that’s what we’re seeing happen.Q: Yes Bank have the advantage of being more digital-focused. Yes Bank is newer, and RBL has a reasonable branch network, though not very large. But will the return on investment (ROI) be justified for any global bank?Varadarajan: If you look at the geographies from which these investments are coming, these are cash-rich regions, seeking long-term investments. The threshold returns they expect are linked more to growth in these entities rather than immediate return on equity, which will build over time.It gives them access to a growing market and customer base, and the visibility of growth is very high. They’re investing to ride through the cycles.That’s how both the RBL and Yes Bank transactions have played out. Federal Bank, in particular, is a well-run bank, and nothing changes in its operations — it’s primarily a financial investor coming on board.Q: You said you don’t see a flood, only a trickle. The top five banks in India are already very large — is that what makes you a little sceptical that foreign capital may not rush in?Daruwala: The number of entities or platforms available for foreign banks is limited. If you take the next tier of banks, they are quite small — some of them, like Karnataka Bank, Karur Vysya Bank, etc.It’s possible that some of these entities may not be very exciting for foreign banks, whereas RBL and Yes Bank are much larger in the Indian context.That said, if a foreign bank wants a ready-made platform, such opportunities do exist. But cultural alignment can be a challenge — global banks often find it hard to revitalise and align the culture of acquired institutions with their own aspirations.Also Read: New RBI rule: Banks move to secure ‘.bank.in’ domains to curb online fraudQ: You also agree that there won’t be a flood of capital?Varadarajan: I agree with Daruwala — there will be no flood of capital. The visibility of growth is there, so people are interested in investing for the long term, more from a strategic or private equity perspective than as banks.However, return expectations need to be moderate. You can’t expect blockbuster returns in three to five years. It’s a long-haul investment.Foreign banks have struggled in the Indian context — the top 10 Indian banks have given them tough competition. Building a business here, whether in wholesale or retail, hasn’t been easy. So, it’s more about having a foothold in a growing market than expecting exciting short-term returns.Q: The bigger excitement for the Indian banking sector now is the draft rules on providing money for acquisitions. Until now, banks could not do that. The rules take effect from April 2026 — banks can lend up to 10% of their Tier-1 capital, which comes to about ₹4–5 trillion for the entire banking system. The borrower must be a profit-making, listed company for the last three years. Is this opening up a big line of business for Indian banks?Daruwala: I would say yes — this is definitely a segment that has long been closed to Indian banks. Earlier, most merger and acquisition (M&A) funding came from foreign portfolio investments (FPIs), non-banking financial companies (NBFCs), or alternative investment funds (AIFs). So, this is clearly an opportunity for Indian banks to step in.Having said that, as you rightly pointed out, there are boundary conditions — a 70:30 debt-equity ratio, the acquiring company must be listed, and it uses up banks’ capital market exposure limits.Many banks don’t have much headroom there. So yes, it’s a new area and an opportunity, but with constraints.Q: Your thoughts. It is not just these constraints. As Daruwala pointed out, the overall 40% Tier-1 capital cap for all capital market exposure remains. Will banks be interested? Banks haven’t shown much appetite for corporate lending itself.Varadarajan: I agree. Again, one should moderate the excitement about what these regulations will achieve.If you look at Tier-1 equity of banks — roughly ₹25 lakh crore — 10% of that is about ₹2.5–3 lakh crore. This limit is not likely to increase over the next three to five years.Even then, I don’t think banks will fully utilise this 10% limit soon. Maybe they’ll reach it over three to five years, meaning about ₹50,000 crore of incremental exposure.Also, ICICI Bank, HDFC Bank, and SBI together hold around 45–50% of the sector’s net worth. So, if they don’t show much interest, given their higher-return alternatives, the overall participation will be limited.So, this will create a window for select deals — where listed, profitable companies with strong ratings will get financing. But to believe every acquisition will now be financed by banks is unrealistic.The business of NBFCs and AIFs won’t be much affected — they operate in a different segment. Sponsor financing will remain strong, as good corporates often prefer structured funding even at slightly higher costs.Banks will scale up gradually, but one shouldn’t expect immediate growth. It’s a good start, though.Q: What’s your take — do you think this three-year listing and profitability requirement should go? It narrows the scope significantly. Do such companies even need bank money?Daruwala: I think most M&As still require some funding. Even if a company has surplus cash flows, it may have capex commitments, so it will still tap the market. Very few are truly zero-debt companies, like some tech firms.So even if they are listed and profit-making, they will access bank or NBFC finance for acquisitions.Varadarajan: I want to add one thing — the way I see it, RBI’s mindset has evolved. Earlier, it was tightening NBFC regulations to bring them on par with banks. Now it’s happening the other way — relaxing bank regulations to make them comparable to NBFCs. So, the playing field is being levelled from both sides.Daruwala: I would just like to add — what Varadarajan said is right. This is a new lane being created, not an autobahn.For the entire discussion, watch the accompanying video
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