Yes Bank-SMBC deal may set stage for more FDI in banking sector

Sumitomo Mitsui Financial Group’s (SMFG) purchase of a 20% stake in Yes Bank may pave the way for other foreign entrants in the banking sector, Fitch Ratings said on Tuesday.

The Yes Bank deal will be the first significant acquisition by a foreign bank and will give SMFG significant control over the lender as its largest shareholder with two board appointees.

It could pave the way for future transactions if the Reserve Bank of India’s (RBI) approval for the transaction sets a precedent, Fitch added.

Earlier this month, Yes Bank said SMFG will purchase its shares worth Rs13,480 crore ($1.58 billion) from eight shareholders, including State Bank of India, valuing the Mumbai-headquartered lender at $7.9 billion.

SBI, which bought a 49% stake in Yes Bank during a 2020 government-backed rescue plan, has been looking to offload shares in the lender after a three-year lock-in period ended in 2023.

The transaction will usher in a new owner who can help the country’s sixth-largest private lender compete better.

India’s foreign direct investment (FDI) rules cap voting rights for investors in banks at 26% and investments by financial institutions in Indian banks at 15%.

While FDI in private sector banks is permitted up to 74%, these tighter caps on voting and ownership stakes have kept foreign participation modest, Fitch Ratings said.

Foreign banks currently hold around 6% of India’s banking assets and just 3% of its loans, when compared with the 77% share of loans and deposits controlled by the country’s top 10 banks.

Yes Bank’s moderate size ((2% of system deposits) may have aided its resolution, but the rescue also showed RBI’s ability to manage mid-sized bank stress, offering a template for future cases, Fitch Ratings said.

Following the regulatory rescue, Yes Bank has stabilized its operations, improved its capital position, and drastically reduced its impaired-loan ratio—from 16.8% in March 2020 to 1.6% by March 2025.

Its standard equity tier-I ratio rebounded from a perilous 0.6% in December 2019 to 13.5% as of March 2025.

Fitch Ratings suggested that if India relaxes its current caps on voting rights and investment thresholds, it could unlock a wave of foreign interest, especially among mid-sized banks seeking growth capital and global expertise.

RBI, however, has signaled a preference for foreign banks with strong track records to set up wholly owned subsidiaries if they want to hold stakes above 26%.

The entry of more foreign players could bring benefits beyond capital infusion.

Enhanced governance standards, improved risk management, and access to global best practices are among the potential upsides, aligning with the RBI’s ongoing efforts to bolster oversight and transparency in the sector.

This is particularly relevant in light of recent governance lapses at other mid-sized private banks, which have underscored the need for stronger oversight.