India Plans Major Overhaul of State-Owned Banks: FDI Cap Hike, Mega Banks, IDBI Privatization

New Delhi | February 3, 2026

The Indian government is working on an ambitious roadmap to strengthen public sector banks (PSBs) by expanding foreign investment, accelerating consolidation, and significantly boosting their balance sheets over the next five years.

Outlining the government’s vision on Monday, Financial Services Secretary M. Nagaraju said the Finance Ministry is preparing a comprehensive strategy aimed at making state-owned banks globally competitive and better equipped to support India’s fast-growing economy.

Government Considers Raising FDI Limit in PSU Banks to 49%

One of the most significant proposals under discussion is increasing the foreign direct investment (FDI) cap in public sector banks to 49%, up from the current 20%.

Nagaraju said the move is being considered to strengthen banks’ capital base, with inter-ministerial consultations already underway. At present, private sector banks in India are allowed to have up to 74% foreign ownership, while PSBs remain capped at 20%.

Officials believe a higher FDI limit would help state-run lenders attract long-term global capital and improve their lending capacity.

Plan to Double PSU Bank Assets in Five Years

The government has also set an aggressive growth target for PSBs. According to Nagaraju, the objective is to double the total asset size of public sector banks within the next five years.

As of September 2025, PSBs had a combined asset base of approximately ₹261 lakh crore. To fund expansion, banks raised nearly ₹45,000 crore from the market last year and are expected to mobilize an additional ₹45,000–₹50,000 crore in the next financial year.

The capital infusion is aimed at supporting credit growth, infrastructure financing, and corporate lending while maintaining strong balance sheets.

IDBI Bank Disinvestment to Move Ahead Soon

Investors awaiting clarity on IDBI Bank privatization received a positive update. Nagaraju said financial bids for the bank’s sale are likely to be invited later this month or early next month.

The Government of India and Life Insurance Corporation of India (LIC) are jointly selling a 60.72% stake in IDBI Bank.

Interested bidders have already received security clearance from the Ministry of Home Affairs, and the Reserve Bank of India has declared them “fit and proper,” clearing key regulatory hurdles.

India Needs Three to Four Global-Scale Banks

The government also reiterated its belief that India requires three to four very large banks rather than a fragmented system of many smaller institutions.

“Given the size of India’s economy, we need a few globally competitive banks that can fund large projects and compete internationally,” Nagaraju said, signaling continued support for consolidation within the banking sector.

Long-Term Vision for Banking Reforms

Together, the proposed FDI liberalization, asset growth strategy, IDBI Bank privatization, and consolidation push underline the government’s long-term vision of building a stronger, more resilient, and globally competitive public banking system.

Market participants and investors are expected to closely track further announcements, especially regarding FDI policy changes and timelines for IDBI Bank’s stake sale.