Recently, there has been a lot of speculation in the market about foreign direct investment (FDI) in public-sector banks. Reports suggested that the government was considering raising the FDI limit to attract more investment into these banks. However, the Finance Ministry issued a clarification that contradicted these claims, leading to volatility in PSU bank stocks and sparking fresh discussions among investors.
Let us break down what the debate around the FDI limit for PSU banks is all about, and what it means for investors.
What’s Happening?
The Minister of State for Finance clarified that the government has no proposal to increase the FDI limit in public-sector banks. Recent media reports had indicated that the government was evaluating an increase in FDI limits as part of broader banking-sector reforms. However, refuting these reports, Minister of State for Finance Pankaj Chaudhary stated in a written reply in the Rajya Sabha on December 2, 2025, that there is no plan to raise the FDI limit in PSU banks.
As per current rules, the FDI limit in PSU banks is 20%, while private banks have a much higher limit of 74%. In private-sector banks, up to 49% FDI is permitted through the automatic route, and investments above 49% and up to 74% require government approval.
While the FDI cap has remained unchanged at 20% over the past five years, the actual foreign shareholding across PSU banks has fluctuated noticeably. SBI consistently stayed above the 10% mark during this period and reached 11.07% in March 2025, the highest among all PSU banks. Bank of Baroda rose from 4.89% to 12.75% in 2024 before declining to 9.43% in 2025. Canara Bank also saw an increase from 3.31% to 10.55%.
Alongside these, other major banks recorded moderate but steady improvement: PNB from 2.30% to 5.85%, Union Bank from 1.34% to 7.48%, Bank of India from 0.40% to 4.52% in 2024 (slipping to 3.89% in 2025), and Indian Bank at 4.74% in 2025. Bank of Maharashtra increased to 1.93%.
In contrast, weaker banks continued to witness very low foreign interest. Indian Overseas Bank (IOB) remained below 0.27%, Punjab & Sind Bank at 0.76%, Central Bank of India at 1.27%, and UCO Bank did not move beyond 0.14%.
Major Foreign Deals in India’s Private Banking Sector in 2025
The year 2025 was exceptionally strong for foreign investment in India’s private banking sector. Global financial institutions continued to announce large deals, signaling confidence in the sector’s stability and growth prospects.
In October, Blackstone invested Rs 6,196 crore to acquire a partial stake in Federal Bank. In the same month, Emirates NBD, the second-largest bank in the UAE, signed a $3 billion deal to acquire a majority stake in RBL Bank.
Additionally, IDFC First Bank secured investment commitments from Warburg Pincus and ADIA, while Abu Dhabi’s International Holding Company expressed interest worth Rs 8,850 crore in Samana Capital. Earlier in May, Japan’s Sumitomo Mitsui Banking Corporation announced a $1.6 billion investment for a 20% stake in YES Bank. Toward the end of the year, Bain Capital planned to acquire an 18% stake in Manappuram Finance for Rs 4,385 crore.
What Does This Mean for Investors?
After the government clearly stated that there is no proposal to increase the FDI limit, the market reacted immediately. PSU banking stocks such as Indian Bank, PNB, and other state-owned lenders fell by 3% to 3.5%. Investors had expected that a higher FDI limit would attract more foreign capital, which could improve valuations and support future growth. With those expectations fading, the stocks faced selling pressure.
For investors, the message is mixed. Higher FDI could have unlocked additional growth opportunities, but the government’s stance indicates a preference for policy stability, which reduces the likelihood of sudden major changes. PSU banks have been reporting steady improvement in asset quality, and credit growth remains healthy. This means long-term investors can continue to rely on fundamentals, though short-term price movements will likely remain sensitive to policy-related updates.
What’s Next?
The road ahead suggests that while the government remains committed to gradual banking-sector reforms, it is not in a rush to introduce significant changes such as raising the FDI limit. If a fresh proposal emerges in the future, it could rekindle interest in PSU banks and support their growth story.
For now, investors should avoid basing trading or investment decisions based on speculation. Rely only on official announcements and maintain a cautious approach. If the government eventually revisits the FDI limit, it could add momentum to PSU banks’ long-term prospects, but at present, the situation remains steady.
*The companies mentioned in the article are for information purposes only. This is not investment advice.
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