The Indian government is in talks with the Reserve Bank of India (RBI) and lenders to encourage the creation of larger, more globally competitive banks through the potential mergers of state-run institutions, Reuters reports, citing Finance Minister Nirmala Sitharaman.

Discussions underway: India “needs a lot of big, world-class banks,” Sitharaman said, adding that work has already begun with the central bank and lenders. Consolidation of existing public-sector banks could be one approach, though developing the right ecosystem for expansion is equally important, she said.

Regulatory backdrop: The RBI lifted curbs last month on bank acquisition financing to boost credit flow in the real economy, Reuters reports, citing RBI Governor Sanjay Malhotra. The change allows banks to fund takeovers under new guardrails that cap lending at 70% of transaction value and limit debt-to-equity ratios. The move is part of a broader set of measures aimed at strengthening credit growth and ensuring stability across India’s banking system.

Reform context: The government had earlier merged 27 public-sector banks into 12 in 2020 to strengthen the sector. Building well-capitalised banks aligns with India’s goal of becoming a developed economy by 2047 and is essential to meet the country’s growing credit needs, Sitharaman said. The government is also considering raising foreign investment limits in state-owned banks as part of its broader financial-sector reforms.

BY THE NUMBERS- India had 12 state-owned banks with combined assets of about INR 171 tn (USD 1.95 tn) as of March, accounting for roughly 55% of the country’s banking sector.

THE UAE ANGLE-

The reform talks come as Adia was reportedly among the buyers of a 3.45% stake in RBL Bank recently sold by conglomerate Mahindra & Mahindra, according to Moneycontrol. The Indian conglomerate sold 21.1 mn shares at INR 320.7 each, marking a full exit from its holding in the private-sector Indian lender. The transaction is worth roughly INR 6.8 bn, according to our calculations.

The sale follows a surge in RBL Bank’s share price after RBL announced that Emirates NBD will launch its open offer for the Mumbai-listed bank’s public shares on Friday, 12 December. Emirates NBD’s board approved a plan last month to acquire 51-74% of India’s RBL Bank through a USD 3 bn preferential share issuance, marking what would be the largest foreign investment in India’s financial sector.

Other buyers included global investors Goldman Sachs, Morgan Stanley, Citigroup Global, and Societe Generale, alongside leading Indian institutional investors including SBI Mutual Fund, Kotak Mahindra Mutual Fund, and HDFC Standard Life Ins.

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