After over a decade of caution, global capital is knocking on the doors of India’s banks. This time, interest is not tentative. It’s decisive.

What we are witnessing today is arguably the strongest wave of foreign participation in Indian banking since the 2008–2010 period. But unlike earlier cycles when foreign money arrived chasing growth and exited at the first sign of stress this wave feels different. It is arriving with patience, intent, and a longer horizon.

That change didn’t happen overnight. It reflects a broader shift in how global investors now perceive India’s financial system. For years, Indian banking was seen as cyclical and fragile high growth, but high risk. Today, that perception has quietly flipped. India’s banks are increasingly viewed as stable, scalable, and institutionally mature.

The reason lies not in promises or policy speeches, but in what has already been done.
For much of the previous decade, Indian banking struggled under the weight of bad loans, weak underwriting, and balance sheets stretched by aggressive corporate lending. The consequences were visible. Asset quality deteriorated, capital had to be injected repeatedly, and confidence eroded. For foreign investors, this made Indian banks difficult to trust, let alone invest in.

That phase, however, has largely passed.
Over the last several years, the system went through a painful but necessary clean-up. Gross non-performing assets, which stood at an alarming 11.2% in 2018, steadily declined to around 3.1% by 2025. This improvement wasn’t cosmetic. Banks were forced to recognise stress early, provision adequately, and tighten underwriting standards. In simple terms, problems were no longer postponed, they were addressed.

Crucially, this clean-up didn’t come at the cost of growth. Instead of freezing credit, banks changed the nature of lending.

As corporate-heavy balance sheets gave way to more diversified portfolios, retail and MSME loans emerged as the primary drivers of incremental credit growth. Today, overall credit growth has re-accelerated to over 14% year-on-year, but the risk profile looks far healthier than it did a decade ago. Smaller ticket sizes, broader borrower bases, and better data have made lending more resilient.

What enabled this shift was something India didn’t have in earlier cycles: a digital financial backbone.
The rapid rise of platforms like UPI, Account Aggregators, and the Open Credit Enablement Network quietly transformed how credit is assessed and delivered. Data availability improved. Turnaround times collapsed. Risk assessment became more precise. Lending that once took weeks could now happen in days, sometimes hours. This made growth not just faster, but scalable.

As banks became more efficient and predictable, confidence began to return. And with confidence came capital.

The Deals That Made Everyone Pay Attention

The confidence in India’s financial system isn’t limited to banks alone. It extends just as strongly to large, well-established NBFCs especially those sitting at the heart of India’s credit demand.
Mitsubishi UFJ Financial Group (MUFG) is set to acquire a 20% stake in Shriram Finance for about $4.4 billion, making it the largest foreign direct investment ever in India’s financial services sector. Deals of this size aren’t opportunistic. They’re long-term commitments. For MUFG, India offers what Japan no longer can: structural credit growth, rising consumption, and decades of runway. Shriram Finance, with its deep reach in vehicle finance and MSME lending, gives MUFG direct exposure to that growth.

The Middle East is telling a similar story.
Abu Dhabi’s International Holding Company (IHC) agreed to acquire around 41.2% stake in Sammaan Capital in a near $1 billion deal. Housing finance is a slow, steady business built on long-term demand, not quick cycles. IHC’s move signals conviction in India’s mortgage growth story and in the regulatory stability governing NBFCs.

When Emirates NBD agreed to acquire around 60% stake in RBL Bank through a $3 billion preferential issue, it marked a turning point. This wasn’t just another foreign investment, it was the first time a Middle Eastern bank took controlling ownership of an Indian private sector lender. Such decisions are not taken lightly. They require deep conviction in the regulatory environment, governance framework, and long-term profitability of the system.

For RBL Bank, the investment brought more than balance-sheet support. It enabled expansion, accelerated digital upgrades, and strengthened its competitive position in a sector where scale and capital efficiency increasingly matter. At a broader level, it reflected how India–UAE financial ties are evolving from transactional flows to long-term institutional partnerships.

Soon after, Japan made its own statement.
Sumitomo Mitsui Banking Corporation’s $1.52 billion investment in Yes Bank India’s largest cross-border banking deal reinforced the same message. Japan’s domestic banking market is mature, low-growth, and constrained by demographics. To grow meaningfully, Japanese banks must look outward. Among emerging markets, India stands out for one reason: it combines growth with improving stability.
For Yes Bank, still rebuilding credibility after its 2020 restructuring, SMBC’s entry was more than capital. It was validation. It signalled that the recovery was not just visible, but believable to one of the world’s most conservative banking systems.

Together, these deals reveal something important. Foreign banks are not entering India to rescue stressed institutions. They are stepping in after the system has stabilised, when risks are better understood and earnings visibility has improved.

That confidence is also reinforced by the macro backdrop.
India remains the fastest-growing major economy, with GDP growth estimated around 7.2% in FY25. Inflation volatility has been relatively contained, and foreign exchange reserves of roughly USD 665 billion provide resilience against external shocks. For global investors, this reduces the probability of sudden disruptions, an essential consideration when deploying long-term capital.
Add to this India’s favourable demographics. A young, increasingly credit-seeking population creates a structural tailwind for retail banking. This isn’t a short-term demand spike. It’s a multi-decade opportunity.

But perhaps the most underappreciated contributor to this renewed interest is regulation.
Over the years, the Reserve Bank of India has built a reputation as a regulator that prioritises prudence over popularity. Its insistence on early stress recognition, adequate capital buffers, and governance discipline fundamentally changed how banks operate. For domestic players, this meant fewer shortcuts. For foreign investors, it meant something far more valuable: trust.

Trust that earnings are real.
Trust that balance sheets are credible.
Trust that risks are identified early, not hidden.

With that foundation in place, attention naturally shifted to valuations and cycles.
One of the core reasons foreign institutional investors are once again paying close attention to Indian banks is the combination of where valuations are today and where the underlying banking cycle is headed. Banking is not inherently a linear business. It moves in phases. And FIIs typically allocate capital not when everything looks perfect, but when valuations are compressed and fundamentals are quietly beginning to improve.
This is exactly what Indian banking is today.

Despite a visible recovery in balance sheets and profitability, bank valuations remain conservative. The Nifty Bank index is currently trading close to its four-year low valuation levels, at around 2.2x price-to-book. Historically, high-quality private sector banks have traded at meaningfully higher multiples during favourable phases of the cycle. The present discount largely reflects past concerns of margin pressure from higher deposit costs, regulatory tightening, and a prolonged period of uncertainty around asset quality. Many of those headwinds, however, are now easing.

Public sector banks tell a similar story. The Nifty PSU Bank index trades at roughly 1.4x price-to-book, well below its historical peak of close to 2x. This is despite several years of balance-sheet clean-up, capital strengthening, and measurable improvements in governance and profitability. For global investors, this creates an asymmetric setup: downside risks appear increasingly contained, while upside remains meaningful if return ratios continue to improve.
But valuations alone are never enough. What truly attracts FIIs is when valuations align with a turning cycle.

Indian banking is entering such a phase. Net interest margins are stabilising after an extended period of pressure. Asset quality continues to improve, pulling credit costs lower. And credit growth has re-accelerated, supported by structural reforms rather than leverage or excess risk. When these forces come together, earnings upgrades and valuation re-rating often follow.

To understand why this matters, it helps to step back and recognise that banking operates through three overlapping cycles, each influencing profitability and risk in different ways. Long-term investors focus less on quarterly noise and more on where these cycles stand.

One is the net interest margin cycle. At its core, NIM represents the spread between what a bank earns on its loans and what it pays on its deposits. In India, most retail and MSME loans are linked to the External Benchmark Lending Rate, which moves closely with the RBI’s repo rate. When the RBI cuts rates, loan yields adjust quickly often within days or weeks. Deposit rates, however, reprice far more slowly, since fixed deposits adjust only upon maturity.

This mismatch creates short-term margin pressure. Over the past six quarters, Indian banks experienced precisely this phenomenon: loan yields fell faster than funding costs, compressing NIMs. Deposit competition intensified, pushing up costs further.
But margin cycles do not move in one direction indefinitely.

NIM expansion begins when deposit costs peak and start easing as high-cost deposits mature and are renewed at lower rates, while loan yields stabilize. That inflection point is now emerging. From around Q2 FY26, deposit repricing pressures have started to ease, even as loan yields have largely held steady. Markets tend to reward this phase early, well before margins fully recover.

The second cycle concerns asset quality and credit costs. This cycle is often misunderstood. Periods of tight liquidity or slower lending do not immediately create new NPAs, but they can mechanically worsen asset quality ratios. When loan books stop growing, existing NPAs form a larger proportion of total loans, even if no new stress is added.

For example, if a bank has ₹100 of loans and ₹3 of NPAs, its GNPA ratio is 3%. If the loan book shrinks to ₹95 due to run-off while NPAs remain unchanged, the GNPA ratio rises to 3.15%. On paper, asset quality looks worse, even though no new defaults occurred.
This dynamic played out in earlier phases. But the trend has now reversed.

From recent quarters onward, GNPA ratios for both banks and NBFCs have started declining meaningfully. System-level GNPA has fallen to around 2.6%, a 12-year low. As asset quality improves, credit costs fall. Lower provisioning and write-offs directly improve profitability and reduce earnings volatility. This is a powerful tailwind that often goes underappreciated until it is well entrenched.
The third and final cycle is credit growth.

In recent years, credit expansion was deliberately restrained amid high food inflation and elevated interest rates. But with inflation now at multi-year lows and the policy stance turning supportive, the RBI has begun enabling credit growth without compromising stability.

A key catalyst here has been the RBI’s decision to ease Liquidity Coverage Ratio run-off norms. Earlier, banks were required to assume high deposit withdrawal risks, forcing them to hold large quantities of low-yield government securities. Under the revised framework, run-off rates on stable and retail deposits were reduced, recognising India’s sticky CASA base.

This reform unlocks an estimated Rs 2.7–3.0 lakh crore of lending capacity, allowing banks to deploy funds into loans without raising deposits, leverage, or risk. Importantly, this is not credit loosening. Asset-quality norms and prudential standards remain unchanged. What has improved is balance-sheet efficiency.

When these three cycles margins, asset quality, and credit growth turn favourable together, banking profitability tends to improve in a durable way.
This is why, from a foreign investor’s perspective, Indian banks now offer a compelling mix: strong balance sheets, improving profitability metrics, and long-term structural growth in credit demand. Valuations have not fully priced in these improvements, and that gap is where FIIs typically step in.

So interest is not driven by short-term momentum. It is driven by a recognition that the worst is behind, the system is healthier, and the cycle is quietly turning in favour of banks and NBFCs alike.