Japanese megabanks focus on India in hunt for higher returns

Major Japanese lenders will likely make further investments in India's financial sector after expanding aggressively in Southeast Asia and the US, seeking high-return investment opportunities beyond their mature home market.

Sumitomo Mitsui Financial Group Inc.'s (SMFG's) acquisition of a 20% stake in India's Yes Bank Ltd. is the first major foray by a Japanese lender into India's private commercial banking sector. The proposed deal, announced in May, may encourage SMFG's peers, especially megabanks Mitsubishi UFJ Financial Group Inc. (MUFG) and Mizuho Financial Group Inc., to consider further investments in the South Asian country's financial sector.

"India is the next market for us to push in," MUFG CEO Hironori Kamezawa told S&P Global Market Intelligence on the sidelines of an earnings press conference on May 15. "India is a tough market to enter, but its economy is growing rapidly."

India's economy, forecast to grow 6.2% in 2025 and 6.3% in 2026 as per the International Monetary Fund, has attracted investments from the Japanese megabanks into its nonbanking industry in recent years as the commercial banking sector remains strictly regulated. SMFG, for instance, acquired Fullerton India Credit Co. Ltd., now called SMFG India Credit Co. Ltd., for $2 billion in 2021, while MUFG invested over $700 million in DMI Finance Pvt. Ltd. in 2023 and 2024, Market Intelligence data showed. Mizuho acquired a 15% stake in digital nonbanking finance company Kisetsu Saison Finance (India) Pvt. Ltd. in 2024.

"It could be possible to consider this kind of investment," Mizuho CEO Masahiro Kihara said at a press conference on May 20, without elaborating further.

Shift to India

Japanese megabanks may be turning their attention to India as the country offers strong loan demand amid a growing economy.

The megabanks may benefit from strong cash demand, especially for retail loans, and robust economic growth in India compared to their home market. India's scheduled commercial banks extended total loans of 160 trillion Indian rupees in 2024, versus 67.4 trillion rupees in 2014, while nonbanks' lending nearly quadrupled to 40.3 trillion rupees, according to a report from Osaka Metropolitan University based on data from the Reserve Bank of India.

Yusuke Morishima, a Tokyo-based partner at Bain & Co., said the biggest reason behind the megabanks' aggressive expansion in the Association of Southeast Asian Nations and India "is the expectation of high economic growth in these geographies compared with the mature Japanese economy."

Further, it is driven by the high level of cash the megabanks have at hand, Morishima said.

The megabanks have announced plans to sell cross-holding stocks of Japanese corporations due to local requirements to increase their price-to-book ratios. Together with "historic high profit level in the last few years, they are proactively looking for high-return investment opportunities," Morishima added.

In India, the megabanks have completed nine transactions — acquisitions, share purchases and funding rounds — since Jan. 1, 2021, according to Market Intelligence data. These were limited to deals in target companies that amounted to at least a $100 million combined transaction value. The aggregate value of all those deals amounted to about $5.12 billion.

Southeast Asia is getting saturated

Further, the megabanks' shift in focus to India came as their strategy to aggressively invest in Southeast Asia may now be complete, analysts said.

"Their strategy [for Southeast Asia] is almost complete," said Toyoki Sameshima, a senior analyst at SBI Securities Co. "Now they are shifting a focus to India, where the population is growing ... They have no choice but to get in there."

According to Market Intelligence data, the megabanks have completed 19 transactions — acquisitions, share purchases and rounds of funding — since Jan. 1, 2021, in Southeast Asia. The aggregate value of the deals amounted to about $7.33 billion.

For SMFG, India was a missing piece to its Asian strategy, Sameshima said.

On the other hand, "MUFG is really willing to go there and they want to invest in a commercial bank that can secure deposits, rather than a nonbank," Sameshima said.

Tough market

Still, investment in India's financial sector, especially private sector banks, is not easy due to strict foreign ownership rules.

The Reserve Bank of India caps aggregate foreign ownership in private sector banks from all sources, including foreign direct investment and foreign institutional investors, at 74%. According to the central bank's master direction document from May 12, 2016, foreign investors need the Reserve Bank of India's approval if their ownership in an Indian private sector bank reaches or exceeds 5%.

A major challenge for Japanese megabanks investing in emerging markets such as India and ASEAN is the need to navigate and comply with constantly evolving regulatory frameworks, said Vivian Wong, Head of Asia-Pacific M&A analytics at Mergermarket.

"In India, the persistent differential treatment between foreign and domestic banks adds another layer of difficulty, making effective competition more challenging," Wong said.

It may be changing, though.

RBI Governor Sanjay Malhotra said the central bank was "examining" foreign shareholding norms and licensing rules as part of a broader review, according to a May 23 article published in The Times of India.

"But in fact, foreign ownership exceeding 5% in a commercial bank is difficult to achieve," said Shotaro Kumagai, a senior economist at Japan Research Institute.

Kumagai added that the Japanese megabanks are, however, heading "in the right direction to increase their presence in India as the Chinese economy is slowing down."