Fitch Ratings believes the stake sale in Yes Bank to Sumitomo Mitsui Financial Group (SMFG) could pave the way for other foreign entrants in India's banking sector.
Japan's SMFG's arm had agreed to buy a 20% stake in Yes Bank for about Rs 13,500 crore ($1.6 billion) in an attempt to profit from opportunities in emerging markets. The development also reflects Yes Bank's significant journey of recovery after its 2020 regulatory rescue. The deal is the biggest foreign investment in India’s banking sector till date.
Fitch Ratings noted that the Yes Bank transaction is the first significant acquisition by a foreign bank in India, giving SMFG significant control over the lender as the largest shareholder along with two board appointees. "It could pave the way for future transactions, if the Reserve Bank of India’s (RBI) approval for the transaction sets a precedent," the statement by Fitch Ratings said.
The foreign investment norms in India cap voting rights for investors in banks at 26 percent, and investments by financial institutions at 15 percent, which in the past have deterred such transactions. However, an increase in the 26 percent cap on voting rights, or the 15 percent threshold could result in more interest from foreign investors in Indian lenders.
"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," said Fitch Ratings.
The acquisition of stake in Indian banking entities could benefit the acquiring banks as it would offer them a wider branch network, which in turn could propel franchise growth in India's competitive banking industry. As of now, foreign banks own about percent of Indian banking assets, with an even lower share in loans and deposits at only three percent. On the other hand, India's top ten lenders make up for more than three-fourth of the loans and deposits, said Fitch.
According to Fitch, this rising interest in Indian banking assets is driven by the sector's growth potential, comparative outperformance of India's GDP in the world, ability to manage risk from trade-related disruptions, and improved financials of lenders after fixing NPA concerns of recent years.
In a reference to IndusInd Bank, Fitch said without naming the lender that "accounting discrepancies and management changes at a mid-sized private bank" have indicated at "ongoing" governance and oversight challenges. The rating agency believes that along with RBI's measures, a greater involvement of global financial entities in Indian banking space could enhance standards and practices in the financial sector.
Fitch Ratings also referred to the resolution enabled the RBI for Yes Bank, calling it 'more nuanced than the typical forced acquisitions of the past'.
The resolution involved full write-downs of Additional Tier 1 instruments of Yes Bank before the consortium led by State Bank of India injected fresh equity.
This, along with improved earnings and liquidity at Yes Bank raised common equity Tier 1 ratio to 13.5% by March 2025 from 0.6% in December 2019, and significantly reduced the impaired-loan ratio. "...the rescue also demonstrated the RBI's ability to manage stress in mid-sized banks, providing a template for future resolutions," said Fitch Ratings.
There are chances of significant equity gains for the SBI-led consortium, which in turn could incentivise the participation by banks or investors in such rescues in future.
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