New Delhi [India] May 27 : The 20 per cent stake buy by Sumitomo Mitsui Financial Group in 'YES BANK' could pave the way for foreign participation in the Indian banking sector, says a report by Fitch Ratings. The Reserve Bank of India's (RBI's) approval of the YES BANK deal could pave the way for similar transactions.
The report adds that increasing voting rights and investment thresholds in Indian banks could further incentivise foreign investors, particularly in the country's mid-sized banking sector.
India's regulations currently cap voting rights for investors in banks at 26 per cent and investments by financial institutions at 15 per cent, which have been a deterrent to larger foreign stake sales.
Fitch Ratings suggests this on the backdrop of the recently announced proposed acquisition of a 20 per cent stake in YES BANK by Japan's Sumitomo Mitsui Financial Group, Inc. (SMFG), which Fitch views as a potentially significant step towards greater foreign involvement. Additionally, this transaction is also seen as a reflection of YES BANK's recovery since its 2020 regulatory rescue.
The report notes that despite the limits, SMFG's 20 per cent stake will make it the largest shareholder in YES BANK, with two board appointees giving it significant control.
The rating agency also points out the RBI's apparent preference for foreign banks with robust performance and governance records to establish wholly-owned Indian subsidiaries if they seek to hold stakes larger than 26 per cent.
Statistically, foreign banks currently hold a relatively small share of India's banking assets (around 6 per cent) and loans (around 3 per cent), compared to the dominance of the top 10 Indian banks.
"Fitch sees investor interest in Indian banks driven by significant growth potential, with expected GDP growth of over 6 per cent in the financial year ending March 2027 (FY27), manageable risks from trade disruptions, and stronger financial performance amid regulatory improvements addressing past asset quality issues," the release said.
It further added that, "Increased global bank involvement could enhance governance standards and practices in India's financial sector, aligning with the RBI's efforts."
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