Sumitomo Mitsui Financial Group’s (SMFG) proposed acquisition of a 20 per cent stake in Yes Bank could redefine how foreign institutions invest in Indian private sector banks, potentially paving the way for greater foreign participation in the sector.Fitch Ratings said the deal, if approved by the Reserve Bank of India (RBI), may set a precedent for similar transactions by foreign financial entities, which have long been constrained by regulatory caps on ownership and voting rights.Current Indian regulations cap foreign investors’ voting rights in private sector banks at 26 per cent and limit financial institutions’ direct investments to 15 per cent. These restrictions have long hampered large-scale acquisitions by global banking players.However, the proposed Yes Bank transaction, once approved by the Reserve Bank of India (RBI), could pave the way for a more flexible regulatory regime. Fitch noted that this will be the first significant acquisition by a foreign bank in India, granting SMFG substantial influence as Yes Bank’s largest shareholder, including the right to appoint two board members.“If RBI’s approval sets a precedent, it could encourage similar transactions in the future,” Fitch said in its statement.Yes Bank announced on May 9 that SMBC, a part of SMFG, plans to acquire the 20 per cent stake—valued at ₹13,480 crore—from existing shareholders including the State Bank of India and other lenders involved in the 2020 reconstruction plan. Fitch noted that the deal reflects Yes Bank’s significant recovery since its near-collapse in 2020.Foreign banks currently control about 6 per cent of India’s banking assets and account for only 3 per cent of total lending. In contrast, the top 10 Indian banks dominate with approximately 77 per cent of sector loans and deposits.Fitch highlighted that India’s strong economic outlook- projected to grow at over 6 per cent annually through FY27—along with regulatory reforms and improving asset quality, make the sector increasingly attractive to foreign investors. Moreover, the RBI has shown a willingness to allow well-regulated foreign institutions to exceed the 26 per cent stake limit, provided the investment is made via Indian subsidiaries under local supervision.However, Fitch also flagged persistent governance and oversight risks saying, “Significant losses due to notable accounting discrepancies and management changes at a mid-sized private bank in the March 2025 quarter indicate ongoing challenges.”This was in reference to IndusInd Bank’s recent disclosure of accounting fraud amounting to Rs 3,400 crore, involving alleged misconduct by former executives and staff. “Increased participation by global banks could help improve governance standards across India’s financial sector, in line with the RBI’s regulatory goals,” Fitch added.
