Yes Bank-SMBC deal could lead to greater foreign investment in Indian banks: Fitch

Mumbai: The proposed 20% stake sale in Yes Bank to Japan’s Sumitomo Mitsui Banking Corp. (SMBC) could unlock a new wave of foreign investment in Indian lenders, if a potential Reserve Bank of India (RBI) approval sets a precedent, Fitch Ratings said in a note on Tuesday.

The ₹13,482 crore deal, the largest cross-border investment in the Indian banking sector, comes five years after Yes Bank was rescued by a consortium of Indian banks led by State Bank of India (SBI). A successful transaction with SMBC would allow a partial exit for SBI and other banks involved in that bailout.

“India’s foreign investment norms cap voting rights for investors in banks at 26%, and investments by financial institutions in Indian banks at 15%, which have deterred such stake sales,” Fitch noted.

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Any move to raise the 26% cap on voting rights or the 15% investment threshold could encourage more foreign bank investors, the global rating agency said.

SMBC intends to raise its holding in Yes Bank over time, potentially triggering an open offer, Mint reported on 9 May, citing two bankers familiar with the matter. However, SMBC’s voting rights will remain capped at 26%, in line with RBI regulations.

Read this | Japan's Sumitomo Mitsui Banking gets RBI nod to pick 51% in Yes Bank

“We anticipate that there could be opportunities for investments in India’s mid-sized banks by foreign banks looking to expand their presence in India, although we believe the RBI’s preference is for foreign banks with strong performance and governance to acquire stakes larger than 26% through wholly owned Indian subsidiaries regulated in India,” Fitch said.

The RBI has previously allowed the local unit of a foreign bank to take over a struggling domestic lender. In November 2020, the central bank seized control of Lakshmi Vilas Bank (LVB) and forced a merger with the Indian arm of Singapore’s DBS Bank. That was the first instance of the central bank deploying a foreign-owned bank to stabilize a domestic peer.

According to Fitch, foreign banks currently hold about 6% of India’s total banking assets but account for only 3% of total loans, reflecting their limited role in lending.  By contrast, India’s top 10 banks control roughly 77% of the sector’s loans and deposits. Foreign investor interest in Indian banks is rising, driven by expectations of GDP growth exceeding 6% through FY27, along with low trade risks and improved bank balance sheets following regulatory reforms.

“However, significant losses due to notable accounting discrepancies and management changes at a mid-sized private bank in the quarter ended 31 March 2025 indicate ongoing governance and oversight challenges,” Fitch added.

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On 21 May, IndusInd Bank disclosed that its board suspects fraud by key employees in the accounting and reporting departments, an issue that led to the lender’s biggest-ever quarterly loss of ₹2,329 crore in the March quarter, as it provided for various discrepancies that surfaced during the period.