After the big foreign bet on Indian lenders this year, older private banks get on to the 2026 radar
After a year of record foreign investments into Indian lenders, the question is whether older, mid-sized private sector banks will finally see meaningful global capital inflows in 2026. Mint got experts to list the variables before such investment decisions and which mid-tier lenders could win.
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As a hectic year of deal-making in banking and financial services rolls to a close, experts are predicting that the mergers and acquisitions in 2026 will see mid-sized lenders and foreign capital taking centre-stage.
Friday saw the biggest deal of the year – Mitsubishi UFJ Financial Group pouring nearly ₹40,000 crore into Shriram Finance, India's second largest non-banking finance company, for a 20% stake – in the sector highlighting how India has emerged as a magnet for global capital chasing lenders. Strong balance sheets, regulatory support, and sustained growth prospects have made Indian banks, NBFCs, and investments banks top destination for overseas money.
But as capital flows toward scale, a key question is taking shape: will older, mid-tier private banks finally attract meaningful foreign investment in 2026?
The past year offers clues. In banks, Dubai-based Emirates NBD acquired a 60% stake in RBL Bank for ₹26,853 crore. Other marquee deals included Blackstone’s ₹6,196-crore stake in Federal Bank, SMBC’s 24.22% acquisition in Yes Bank, and Abu Dhabi investors picking up significant stakes in Sammaan Capital and IDFC First Bank.
These deals signal that capital is flowing, but only into banks and other lenders ready for growth, scale, and change.
Selective capital
Bankers and experts say the focus is shifting away from recapitalizing weak balance sheets to upgrading the banking system itself.
“Capital will flow into better platforms rather than into banks [that] merely need funds. Old private sector banks are actually up for a big transition. That may happen through infusions and partnerships," said Abizer Diwanji, founder at NeoStrat Advisors.
Diwanji pointed to banks such as South Indian Bank and Karnataka Bank as potential candidates over time. Several other bankers echoed this view, though many see South Indian Bank as the most likely near-term beneficiary.
DCB Bank declined to comment for this story. Emails sent to South Indian Bank, Karnataka Bank, Tamilnad Mercantile Bank, Karur Vysya Bank, and Federal Bank remained unanswered till press time.
“If platforms are built, capital will follow," Diwanji said.
Why they matter
Mid-sized banks remain inherently attractive to foreign investors due to their untapped growth potential, bankers quoted above said.
Most of these banks also maintain healthy capital buffers. As of the September quarter, DCB Bank reported a capital adequacy ratio of 16.41%, South Indian Bank 17.70%, Karnataka Bank 20.84%, Tamilnad Mercantile Bank 30.96% and Karur Vysya Bank 16.58%—all well above the RBI’s minimum capital-to-risk weighted assets ratio (CRAR) requirement of 9%.
“These are established brands that have not chased aggressive growth," said Vivek Iyer, partner and national leader, financial services – risk advisory, at Grant Thornton.
“It’s less effort and more returns. From that standpoint, a strong established brand with significant upside like mid-tier banks are attractive options in the scheduled commercial bank space," Iyer said, adding that south India-based banks offer meaningful growth opportunities.
Competitive churn
Iyer also noted that south-based mid-tier banks continue to be closely tracked by global investors seeking growth opportunities.
Unlike earlier cycles, consolidation and competition are now unfolding simultaneously across India’s banking landscape.
The push for small finance banks to become universal banks, payment banks to transition into small finance banks, and consolidation among urban cooperative banks is creating a crowded and competitive ecosystem.
“Competition improves customer service and efficiency," Iyer said, adding that private equity interest is unlikely to fade as India remains one of the few global growth stories left.
Governance litmus test
Still, experts believe foreign investors may take time to commit, and banks themselves will need to invest first in governance, systems and performance—key filters for global capital.
While South Indian Bank has already begun this process, others such as Karnataka Bank, Tamilnad Mercantile Bank and City Union Bank may need deeper reforms.
Scepticism remains over whether traditional old private sector banks are ready for such change, said Prakash Agarwal, partner at Gefion Capital.
Some analysts argue these banks are deeply community-driven, with concentrated loan books and limited appetite for risk.
“Historically, whenever they tried to break out with large loans, they ran into trouble," Agarwal said.
Funding pressures
Except for Federal Bank, most old private sector banks lack access to low-cost overseas funding and strong current account and savings account (CASA) franchises. Result: elevated funding costs.
While Federal Bank’s CASA ratio stood at 31.01% at the end of September, up from 30.07% a year earlier, others have seen mixed trends.
South Indian Bank reported a CASA ratio of 31.86%, up six basis points year-on-year, while Karnataka Bank’s rose 22 bps to 31.01%.
DCB Bank’s CASA ratio declined to 23.52% from 25.61% a year ago, while Karur Vysya Bank’s fell to 27.65% from 29.46%.
In a market where large corporates increasingly prefer dealing with a handful of big banks, older private sector lenders risk being squeezed on both growth and funding.
What lies ahead
Foreign investors, Agarwal said, look for strong growth visibility and meaningful governance influence—both difficult under the current ownership and management structures of old private sector banks.
“In this current shape and structure, foreign capital coming in is limited," he said, unless banks are willing to overhaul management, expand product offerings and rethink growth strategies.
AM Karthik, co-group head of financial sector ratings at ICRA, echoed this view, suggesting that only select names, such as South Indian Bank, may see near-term interest.
“Capital is not scarce," Karthik said. “The question is what banks plan to do with it? Clean up bad loans or pursue a new business model?"
As 2025 draws to a close, the message from the industry is clear: foreign capital is willing, but selective.
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