Why global capital has found its next great love affair in India’s banks

“Exciting times,” billionaire banker Uday Kotak declared last week, welcoming India’s landmark move to allow majority foreign ownership in its banking sector. The founder of Kotak Mahindra Bank called it a long-awaited signal of confidence, especially one that could “unleash capacity to serve India’s aspirations” while drawing global capital under clear guardrails.

That optimism is already visible in the numbers. Foreign capital is flowing into Indian lenders at a pace not seen in more than a decade. Deals worth almost $15 billion have been struck this year, according to Bloomberg estimates, led by marquee investors including Blackstone, Emirates NBD, Sumitomo Mitsui Banking Corp., Warburg Pincus, and the Abu Dhabi Investment Authority.

Blackstone’s $740-million bet on Federal Bank headlines the wave, while Dubai’s Emirates NBD is set to acquire a majority stake in RBL Bank for about $3 billion, the largest cross-border deal in Indian banking history. Japan’s SMBC and Middle Eastern sovereign funds have also joined in, marking a striking shift in how global financiers view India’s once-risky lenders.

Clean-up of banking sector

Foreign investors are not just chasing yield; they are responding to a deep structural reset. Over the past decade, India’s banking system has undergone one of the most aggressive clean-ups among emerging markets. The gross non-performing asset ratio of scheduled commercial banks peaked at 11.2 per cent in 2018 and has since fallen to 2.8 per cent in 2024, according to RBI data.

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More than Rs 3.1 trillion in bad loans have been resolved under the Insolvency and Bankruptcy Code, while public sector banks have received over Rs 3.5 trillion in government recapitalisation support, bolstering capital adequacy and restoring confidence. The merger of 10 state-run banks into four large entities further strengthened capital buffers and reduced operational overlap. Together, these measures have transformed the balance sheets of Indian lenders.

“The Indian banking sector’s structural transformation is visible from the aggressive asset-quality cleanup, consolidation and recapitalisation of PSU banks, and improved regulatory governance,” said Rajesh Palviya, head of technical research at Axis Securities. “Banks now have healthy balance sheets, adequate capitalisation, better credit discipline and a sharper focus on profitable growth. The regulator’s pro-growth stance and efforts to ease compliance have created a more conducive environment for lenders.”

Confidence in India’s lenders

Palviya added that the current wave of foreign investments, particularly in mid-sized private banks, reflects growing conviction that India’s lenders are well placed to ride the next domestic credit upcycle.

That confidence also stems from a decade of governance reform that has reshaped how India’s banks are run. “The turnaround of the banking system in India is legendary,” said Charan Singh, chief executive at the EGROW Foundation. “The most important driver has been governance reform: boards strengthened, political interference eliminated, and lenders recapitalised with performance-oriented targets. Consolidation through mergers sent a clear message of accountability and efficiency.”

He credited the government’s consistency and regulatory integrity for restoring faith. “Non-performing assets have been reduced to global minimums,” Singh said. “The political leadership’s clarity in financial-sector management is now yielding results.”

Nifty Bank performance

The Nifty Bank index, which signals how the sector has been performing on the stock markets, has had a volatile run between 2020 and 2025. There were significant gains in the early part of this period followed by a strong rally in 2024. It faced a slump in January 2025 but hit record highs in late 2025, driven by factors like increased foreign institutional investor interest in private banks and positive performance from PSU banks.

Timing and strategy

For N Kamakoti, managing director and CEO of City Union Bank, the surge of foreign interest reflects both timing and strategy. “When it comes to foreign institutional investors, there are two kinds,” he said. “One set moves wherever opportunity arises; they will invest in India if the environment looks attractive, or elsewhere if returns shift. The other group, long-term strategic investors, wants a permanent foothold in India’s financial system. They are looking at multiple decades ahead.”

He pointed to recent investments by Japanese and Middle Eastern banks as examples of strategic, not speculative, capital. “These institutions want strategic footage in India because of their outlook on the Indian economy’s performance for many decades to come,” Kamakoti said. “It is not a broad-based class of investors entering; it is a handful of serious institutions taking a long-term call.”

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India’s banks, he argued, are now in one of their strongest asset-quality phases in decades. “If you look back 10 to 15 years, the 2008 global crisis, the 2014 asset-quality stress, and COVID, each was followed by recovery,” Kamakoti said. “Now we are going through one of the best possible asset-quality cycles. Capital adequacy has improved, and the balance sheets are much stronger.”

Credit to RBI

Much of that resilience, he said, owes to the Reserve Bank of India’s consistency. “The regulator took the right actions at the right time, during the AQR cycle and during COVID, ensuring counter-cyclical measures that protected the financial sector. The Indian depositor has not lost a single rupee since the 1960s because of a commercial-bank failure. That integrity builds global trust.”

While global capital often follows the “China-plus-one” logic in manufacturing, Kamakoti said banking operates on a different plane. “That strategy applies to supply chains and raw materials,” he said. “In banking, the play is about trust, regulation, and the strength of the domestic economy.”

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As India’s financial system deepens, Kamakoti believes the next phase of growth will come from formalisation and data-driven lending. “Integration of UPI transactions, the formalisation of small businesses, and rural access to credit are creating new credit trails,” he said. “In the next decade, the biggest play will be how this data translates into access to credit. That is where the real transformation will happen.”