For most of 2025, Foreign Portfolio Investors (FPIs) have remained net sellers in Indian equity markets. This selling has been broad-based, and the financial sector has felt the pressure the most. However, amid this widespread selling, a contrasting and unexpected trend has emerged.
Foreign capital is now moving toward companies that domestic investors had long overlooked. Since January this year, India’s financial services companies have attracted nearly $15 billion in foreign investment. This shift is not just about inflows; it reflects a major strategic change in how global investors view India’s banking and financial sector.
Let us understand why FPIs are investing in stressed Indian companies and what this means for investors.
What’s Happening?
In recent months, especially in October 2025, large deals in India’s banking sector have created fresh excitement in the market. Foreign investment is no longer restricted to strong and well-established banks; it is now finding its way to lenders that have faced significant challenges over the past few years.
Investments such as Emirates NBD’s Rs 11,636 crore stake in RBL Bank, Blackstone’s Rs 6,196 crore investment in Federal Bank, and the combined Rs 7,500 crore infusion by Warburg Pincus and ADIA in IDFC First Bank clearly show that global capital is seeking long-term strategic partnerships in India rather than short-term trading gains.
Meanwhile, foreign ownership in HDFC Bank has reached 48.4% and in ICICI Bank 46.8%, while the foreign investment cap in private banks stands at 74%. This gap indicates that there is still significant room for more foreign capital to flow into the sector over the coming years.
Banks’ Internal Transformation and Reforms
The sharp rise in foreign investment in Indian banks is driven not by external factors but by strong structural improvements within the institutions themselves. After years of dealing with bad loans, governance concerns, and weak balance sheets, several banks have completed a difficult clean-up cycle. Today’s inflow of global capital is therefore seen not as emergency support, but as a vote of confidence in their renewed strength and long-term potential.
Here are a few examples of how major banks have strengthened their positions:
- Yes Bank: After the 2020 crisis, the management executed a multi-year rebuild. The bank transferred Rs 48,000 crore worth of stressed assets to JC Flowers ARC and shifted focus toward retail and MSME lending.
- IDFC First Bank: The bank reduced its legacy corporate loan exposure linked to old infrastructure financing and refocused on retail banking. Investments from Warburg Pincus and ADIA directly reflect this transformation.
- RBL Bank: The bank acknowledged challenges in its high-risk micro-banking and credit card portfolios, tightened underwriting standards, and rebalanced toward safer retail lending.
- Sammaan Capital: Formerly known as Indiabulls Housing Finance, the company exited its risky real-estate lending model and reinvented itself as an asset-light NBFC focused on retail mortgages, affordable housing, and MSME loans. This shift played a key role in attracting the Rs 8,850 crore investment from International Holding Company.
Why does India still Offer Massive Banking Potential?
Beyond domestic reforms, what attracts global investors to India’s banking sector is its strong growth trajectory. According to a McKinsey report, the domestic banking industry earned $46 billion in net income in 2024, recording 31% annual growth, making it one of the fastest-growing banking sectors globally.
A Boston Consulting Group (BCG) analysis shows that India’s credit-to-GDP ratio has never crossed 1x, compared to the global average of 1.8x. This indicates that the Indian banking sector still has significant room to expand and remains far from saturation.
Additionally, large investments from UAE-based institutions send a broader signal, India is no longer dependent solely on Western capital. It is emerging as an economic powerhouse with diversified and stable funding sources.
What’s in it for Investors?
According to the Financial Times, while the broader Indian equity market is trading at 23x forward earnings, a level seen as expensive, financial companies are available at just 17x. This suggests the sector remains relatively undervalued and may offer an attractive entry point for long-term investors.
Dealogic data shows that foreign investors have poured $8 billion into Indian banking deals so far this year, significantly higher than $2.3 billion in 2024 and $1.4 billion in 2023. This reflects rising confidence in the sector. Additionally, several older private banks are trading at a price-to-book ratio of just 0.7x, placing them firmly in the value stock category.
What’s Next?
Foreign interest in India’s banking sector is rising because credit demand is expected to remain strong over the long term. According to the Financial Times, Yatin Singh of Emkay Global states that no matter which lending segment you choose, the next 15–25 years are full of opportunities, and buying a bank in India is often a 50-year strategic decision.
The trend is clear: many Indian lenders have endured difficult phases, strengthened their risk management frameworks, cleaned up balance sheets, and seen valuations correct. Now, foreign capital is backing these improvements as a path to future growth.
However, risks remain. Cultural and operational shifts take time, and these institutions must still demonstrate that their new business models can withstand the next credit cycle.
*The companies mentioned in the article are for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
