PTI New Delhi

Fitch Ratings on Tuesday said Sumitomo Mitsui Financial Group's (SMFG) 20% stake buy in Yes Bank could pave way for other foreign entrants in the Indian banking sector. 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, its said.

"The Yes Bank transaction will be the first significant acquisition by a foreign bank and would give SMFG significant control over Yes BANK as the largest shareholder with two board appointees. It could pave the way for future transactions, if the RBI approval for the transaction sets a precedent," Fitch said in a statement.

Any increase in the 26% cap on voting rights, or the 15% investment threshold could encourage foreign bank investors. "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.

On May 9, Yes Bank announced that SMBC will acquire a 20 per cent stake from its shareholders, including the State Bank of India and several Indian banks, which had participated in the banks' reconstruction scheme in 2020, for around Rs 13,480 crore.

"The announced sale of a 20 per cent stake in Yes Bank to Sumitomo Mitsui Financial Group, Inc, could pave the way for other foreign entrants in the Indian banking sector," says Fitch Ratings.  "It also reflects Yes Bank's significant recovery following its 2020 regulatory rescue," Fitch said.

Foreign banks hold about 6 per cent of India's banking assets though their loan share is significantly lower at about 3 per cent. In contrast, India's top 10 banks account for about 77% of the sector's loans and deposits. Fitch sees investor interest in Indian banks driven by significant growth potential, with expected GDP growth of over 6% in the financial year ending March 2027 (FY27), manageable risks from trade disruptions, and stronger financial performance amid regulatory improvements addressing past asset quality issues.

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