Banks urged by Nagaraju to boost capital, increase lending

Banks urged by Nagaraju to boost capital, increase lending

The banking sector in India is poised for growth and expansion, with the government and regulatory bodies taking steps to facilitate foreign investment. Financial services secretary M Nagaraju has suggested that if foreign capital comes at a cheaper rate, it should be welcomed to expand credit [1].

Nagaraju has also hinted at reviewing Foreign Direct Investment (FDI) rules and further consolidation of public sector banks (PSBs) to unlock growth. The current FDI rules in India’s banking sector allow foreign investment primarily under the automatic and government approval routes, with sectoral caps in place. For private sector banks, the FDI limit is currently set at 74%, regulated by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) and the government’s FDI policy framework [2][3].

Recent amendments aim to clarify rules around share issuance to foreign investors, potentially easing foreign shareholding and capital raising, even in sectors with restricted FDI such as banking. The Ministry of Finance’s 2025 amendment to rule 7 of the Foreign Exchange Management (Non-debt Instruments) rules permits issuance of bonus shares to non-resident shareholders without changing the overall foreign shareholding pattern [1].

These changes are expected to have a significant impact on Indian banks' capital raising and lending capacity. Increased foreign inflows will make it easier for banks to tap foreign investment, improving their capital base. Enhanced capital adequacy will help banks meet Basel III requirements and regulator-mandated capital adequacy norms, enabling expanded lending [1][2][3].

Streamlining FDI regulations will also boost foreign investor confidence and willingness to participate in Indian banking. With stronger capital buffers from FDI, banks can increase credit disbursements, supporting economic growth [1][2][3]. Overall, these rules signal a gradual liberalization and facilitation of foreign investment in banking, which will strengthen the sector’s capital position and potentially lead to expanded credit availability in India [1][2][3].

However, the government and RBI maintain controls to protect national interest and financial stability, so liberalization is measured and sector-specific. As of mid-2025, no fundamental upheaval of FDI caps in banking has been announced. However, the clearer regulatory environment and allowance for nuanced capital-raising transactions are likely to improve Indian banks' ability to raise capital from foreign investors and expand lending capacity over time [1][2][3].

As of June 27, 2025, credit offtake was up 9.5% on year, lagging deposit growth of 10.1%. State Bank of India (SBI) has raised Rs 25,000 crore through qualified institutional placements (QIPs) to bolster its capital base [4]. Other state-run banks are set to raise Rs 20,000 crore via this route in the current financial year [5].

Banks should reimagine deposit mobilisation and increase leverage and productivity, deepen digital and data capabilities, and build future-readiness in terms of ESG-resilience and governance. There is a need for sustained high growth in credit flows to sectors of the economy, including MSMEs [5]. Banks should focus on capital conservation by reducing operational costs with the use of technology [6].

Banks should not hesitate to explore multiple avenues to raise capital, including foreign direct investment (FDI), green bonds, and global markets [6]. Access to capital from all sources needs to be worked upon to facilitate access to global funds, best talent, and technical expertise [7].

It's worth noting that only two Indian banks - SBI and HDFC - are currently in the top 100 global banks by total assets [8]. Banks anchor inclusive growth by bringing the unbanked under formal financial systems [9]. Further consolidation of PSBs may occur where synergies are present [9].

In conclusion, the Indian banking sector is undergoing significant changes to facilitate foreign investment and capital raising. These changes are expected to strengthen the sector's capital position, improve lending capacity, and support economic growth. However, the government and RBI maintain controls to protect national interest and financial stability, ensuring a measured and sector-specific approach to liberalization.

1. Financial services secretary M Nagaraju has suggested that foreign capital should be welcomed in the Indian banking sector if it comes at a cheaper rate to expand credit.
2. The government and regulatory bodies in India are taking steps to facilitate foreign investment in the banking sector, with the aim of unlocking growth.
3. The current FDI rules in India’s banking sector allow foreign investment primarily under the automatic and government approval routes, with sectoral caps in place.
4. Recent amendments aim to clarify rules around share issuance to foreign investors, potentially easing foreign shareholding and capital raising, even in sectors with restricted FDI such as banking.
5. Streamlining FDI regulations will also boost foreign investor confidence and willingness to participate in Indian banking, with stronger capital buffers from FDI enabling banks to increase credit disbursements.
6. Banks should not hesitate to explore multiple avenues to raise capital, including foreign direct investment (FDI), green bonds, and global markets.
7. The Indian economy will benefit from increased foreign inflows and expanded credit availability, as the Indian banking sector strengthens its capital position through foreign investment and capital raising efforts.

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