Mid-sized lenders tap foreign links, tech to gain scale

Mumbai: In a line of business where a large balance sheet is traditionally considered the key to success, mid-sized lenders are harnessing strategic deals and technology to alter the dynamics of India's size-dictated banking industry, analysts said, referring to the latest raft of cross-border transactions involving smaller banks.

These partnerships would provide the smaller lenders, hitherto dragged down by balance sheet limitations, with the capital strength and scale needed to capture market share from established private and public sector giants, analysts said.

"This is a big positive for smaller lenders as it addresses their main impediments to scalability - including access to capital, market stature, which helps lower the cost of deposits and borrowings, and access to world-class systems, processes, and governance frameworks," said Seshadri Sen, head of research, Emkay Global. "We expect this cohort to gain market share at the expense of larger private and public sector banks."

Fresh capital infusion should fortify balance sheets, reduce funding costs, and resolve long-standing constraints that have limited growth for smaller lenders so far.

Over the past three months, marquee transactions such as Blackstone-Federal Bank (₹6,200 crore), Emirates NBD-RBL Bank (₹26,850 crore), SMBC-Yes Bank (₹15,000+ crore), Abu Dhabi IHC-Samman (₹8,850 crore), and Warburg Pincus-IDFC First Bank (₹4,876 crore) have brought in significant foreign and strategic capital.

Thews and Sinews

"These investors bring deep pockets and global experience, which will help Indian banks compete more effectively in the credit markets," said Prakash Agarwal, partner at Gefion Capital. "India's debt-to-GDP ratio remains low, so there is immense scope for these lenders to expand their market share."

Analysts also noted that this wave of foreign investments signals a more open stance from the banking regulator toward allowing FDI in smaller banks - institutions that need capital, technology, and stronger governance structures to scale sustainably.

However, some experts caution that while these mid-sized banks may grow their corporate lending businesses, making headway in the retail segment will be a tougher battle.

"SBI, HDFC Bank, and ICICI Bank together control nearly 70% of the salary account market - their dominance in retail is unmatched," said Suresh Ganapathy, India Head - Financials at Macquarie Capital. "While foreign partnerships can open up new corporate opportunities, retail banking is far harder to disrupt. That said, with PSU banks still holding around 40% market share and remaining government-owned, that space presents easier pickings for challengers."