Government May Raise FDI Limit in Public Sector Banks from 20% to 49%

The Indian government is considering increasing the Foreign Direct Investment (FDI) limit in public sector banks (PSBs) from the current 20% to 49% in order to attract more foreign capital and strengthen the country’s banking sector. The Finance Ministry, in consultation with the Reserve Bank of India (RBI), is evaluating the proposal as part of broader financial reforms.

Objective of Raising the FDI Cap

The proposed change seeks to open new investment opportunities in India’s banking system amid strong economic growth and rising credit demand. By expanding the FDI limit, the government aims to attract long-term institutional investors, strengthen bank balance sheets, and accelerate capital adequacy compliance under Basel III norms.

Aligning PSBs with Private Sector Banks

Currently, foreign investors can own up to 74% in private sector banks, while public sector banks are limited to 20%. The proposed increase to 49% would narrow this gap while maintaining at least 51% government ownership — ensuring public control and adherence to governance standards. Individual foreign shareholders’ voting rights are expected to remain capped at 10%.

Current FDI Levels in Major PSU Banks

Foreign holdings in leading PSBs are currently well below the existing 20% ceiling, suggesting significant room for additional investment if the cap is raised. According to recent data, foreign ownership stands at approximately 9.6% in the State Bank of India (SBI) and around 12% in Canara Bank.

Expected Economic Impact

If approved, the reform could boost market confidence and increase capital inflows into India’s banking and financial services sector. It could also support the recapitalization efforts of PSBs without putting additional fiscal pressure on the government. Higher foreign participation would deepen India’s financial markets and support the country’s aspiration to become a $5 trillion economy.