The RBI has allowed Foreign Direct Investment (FDI) up to 74% in the Indian private banks. What could be the possible implications of this move?The Indian banking sector is undergoing structural changes by regulatory frameworks. Among other things, the FDI limit in Indian private banks has been increased to 74% from the previous 49% in the mini-budget, 2004-2005. The move towards liberalization of Indian banking sector will open the way for foreign banks for future acquisitions and to widen their networks in India. Through this process of liberalization and deregulation, it is hoped that the Indian economy can achieve the status of a fully developed nation.

The FDI hike is only available to a regulated wholly owned subsidiary of a foreign bank in India. The 74% limit in Indian private bank can be through direct or portfolio route. The 74% foreign holding would include FDI, Foreign Institutional Investment (FII), NRIs, initial public offer, private placements and ADRs/GDRs. Interested foreign investors should have mandatory credit rating and permission from the RBI. The current FDI norms are not applicable to Public Sector Banks (PSBs) where the foreign investment ceiling is fixed to 20%. Last year, the limit of foreign participation through FDI route was 49% and through FII it was same 49% totaling to 98% foreign participation, which is now decreased to 74%.