Why foreign investors are bullish on India's small banks and NBFCs

Over ₹1.25 lakh crore of foreign money has come into Indian banks and NBFCs which is something we have not seen at this scale before. And this is not “hot money” or short-term trading interest. It is long-term capital from global institutions that believe India’s credit story is only getting started.

But this confidence did not appear overnight. India opened up the NBFC sector back in 2016 by allowing 100% FDI, yet foreign investors still stayed cautious because the IL&FS and DHFL crises shook trust. The system needed time to repair itself.

Over the next several years, India went through a thorough clean-up cycle, with:

• tighter regulations
• stricter supervision
• balance-sheet repair
• a clear shift to healthier, secured lending

After COVID, balance sheets got better, governance got stronger, and digital reporting got stricter. As these changes became visible, confidence began returning. S&P Global Ratings says that Indian banks are now better able to handle global volatility than they were in previous cycles.

RBI’s own data supports this. GNPA (Gross Non-Performing Assets) across NBFCs have fallen from above 6% in 2021 to nearly 3% in FY25, showing cleaner books. ROA (Return on Assets) has improved steadily, touching around 2.4%. NIM (Net Interest Margin) has remained stable despite global rate shocks, and CRAR (Capital to Risk-Weighted Assets Ratio) has consistently stayed around 25–27%, far above regulatory requirements.

This gradual repair is the foundation behind today’s surge in foreign investment.

A wave of large-scale global investments

In the last few months, some of the biggest financial institutions in the world have invested in small and mid-sized Indian banks and NBFCs. These deals show that investors around the world are becoming more sure of the sector's future.

Major global investments in small Indian banks & NBFCs (2025)

Source: Company Data, Exchange Filings

It's interesting that foreign interest isn't just in banks and NBFCs; it also includes other parts of India's financial sector. For example, Zurich Insurance bought a 70% stake in Kotak General Insurance, which shows that people have faith in the company.

The RBI has also allowed Canada’s Fairfax to retain its majority stake in CSB Bank for five years which is a rare exception that signals support for committed long-term foreign ownership.

Why investors around the world are more confident

Regulations that help

The RBI has made a number of announcements recently to make borrowing easier, cheaper, and safer. These changes are freeing up capital throughout the system and giving banks and NBFCs more room to lend without having to raise new equity.

Some are aimed at certain sectors where India wants credit to grow more quickly. By lowering risk weights, the RBI has made it easier for banks and NBFCs to lend to these sectors.

Other changes make things run more smoothly. Banks can now better manage risk, make more money, and lend money in new areas with clearer rules.

Large & underbanked market

Investors from all over the world know that India has more than 400 million people who don't have access to banking services. Add to that:

• The widespread use of digital payments
• A huge informal credit market
• Rising income levels

This mix makes it possible to lend money on a large scale. According to McKinsey, Indian banks made $46 billion in net income in 2024, a 31% increase from the previous year. However, credit penetration is still much lower than the global average. In short, this means that the market is large, not well served, and makes money.

Low leverage

Many NBFCs that are getting money from outside the country have a lot less debt than other companies in the same field. Low gearing means safer growth, more borrowing power, and the ability to quickly scale up assets without hurting the balance sheet for investors.

Stronger balance sheets

Finally, the whole financial sector is in better shape than it was before. Indian banks and NBFCs have better capital positions, fewer non-performing assets (NPAs), and more disciplined risk frameworks after years of cleaning up. Digital monitoring has made credit processes stronger, and governance standards have gotten better.

Risks that still need to be looked at

Things may look good, but there are still some risks. In some cases, foreign companies may buy a majority stake, which could cause problems if important decisions are made outside of India. More foreign ownership also means that the company is more vulnerable to global shocks, such as a sudden rise in interest rates or a lack of cash.

Regulators need to keep a close eye on things, especially when it comes to complicated deals that cross borders. The RBI has been fair by supporting strategic investments while still enforcing strict rules about who can and can't invest.

Parting thought

Years of hard work, cleaner books, better rules, and stronger governance have led to the foreign money that is now going into India's banks and NBFCs. India's financial sector is entering a new growth phase. There are easier rules for lending, a huge market that isn't served by banks, and more trust from global institutions.

This capital brings more than just money; it also brings global knowledge and a long-term commitment. For investors, it's an early chance to get in on India's next decade of credit growth. It shows that the world trusts India's financial system. And when trust and strong fundamentals come together, they can change the whole industry.