Bhopal: Foreign Direct Investment (FDI) into India’s banking sector has witnessed a dramatic collapse in recent years, with inflows dropping from $898 million in FY23 to a mere $115 million in FY25, according to official data released by the Department for Promotion of Industry and Internal Trade (DPIIT).
The steep fall a reduction of nearly 87% over two fiscal years highlights growing caution among global financial institutions and investors when it comes to committing long-term capital to Indian banks.
Key Reasons Behind the Decline
- High Valuations & Strong Domestic Capital Indian banks, especially large private sector lenders, are currently trading at historically elevated valuations (average P/B ratio of 3.5–4.5x for top players). With robust domestic institutional and retail investor interest, foreign players see limited upside for entry at current prices.
- Regulatory Tightening & Capital Adequacy Focus The Reserve Bank of India (RBI) has maintained a strict stance on capital buffers, asset quality, and provisioning norms. Foreign banks have preferred to grow through organic operations rather than large equity infusions.
- Global Reallocation of Capital Rising interest rates in developed markets (especially the US), geopolitical uncertainties, and attractive yields on domestic bonds in the West have reduced the relative appeal of emerging-market banking investments.
- Shift Toward Fintech & Digital Lending A significant portion of global financial capital flowing into India has shifted from traditional banks to fintech platforms, digital lenders, and NBFCs, which offer higher growth potential and better scalability.
Comparative Data (FDI Equity Inflows in Banking Sector)
| Financial Year | FDI Inflows (US$ million) | YoY Change |
|---|---|---|
| FY23 | 898 | — |
| FY24 | 412 | -54% |
| FY25 | 115 | -72% |
Source: DPIIT FDI Statistics (provisional data for FY25)
Broader Context
While banking FDI has slumped, overall FDI into India remained relatively resilient, with total inflows estimated at $70–72 billion in FY25. Sectors such as computer software & hardware, services, automobile, renewable energy, and e-commerce continued to attract strong foreign capital.
Market & Expert Views
- Banking stocks have largely shrugged off the FDI decline, supported by strong domestic DII flows and robust credit growth.
- Analysts note that the drop in FDI does not reflect weakness in the banking sector itself Indian banks reported healthy NIMs, improving asset quality, and strong credit expansion in FY25.
- However, long-term foreign strategic investors remain cautious about large equity stakes given elevated valuations and regulatory oversight.
Conclusion
The sharp fall in FDI into India’s banking sector from $898 million to just $115 million between FY23 and FY25 is a clear reflection of changed global priorities, high domestic valuations, and the growing preference for fintech and digital-first models. While domestic capital continues to support the sector strongly, the reduced foreign interest highlights the need for policy measures to restore attractiveness for long-term strategic FDI in traditional banking.
