Why foreign money is flooding India's troubled lenders

Summary: Foreign capital is piling into a corner of the market that local investors have long abandoned. With valuations at low levels, it’s worth looking at what’s driving this optimism. Foreign investors have been net sellers of Indian equities through most of this year. The outflows have been broad-based, stretching across sectors and the financial space has felt the pressure even more sharply. Large private banks, which usually anchor foreign investor confidence, have not escaped this sentiment. Yet amid this broad foreign withdrawal, something unusual is happening. A small group of lenders—IDFC First Bank, Sammaan Capital, Manappuram Finance, Yes Bank and RBL Bank—has begun attracting substantial foreign capital. Surprisingly, these aren’t the spotless franchises global institutions typically favour. They have spent years mired in credit losses, governance issues, volatile books or reputation damage. So this contradiction raises an obvious question: If foreign investors are cautious about Indian banking as a whole, why are they selectively buying into its most troubled names? What has changed? The first and most important shift has come from within the lenders themselves. After years of wrestling with bad loans, governance lapses and unstable balance sheets, these institutions have finally done the hard work: cleaning up legacy books, recognising stress upfront and repairing their balance sheets. This trajectory also mirrors an earlier episode. When PSU banks went through a decade-long purge after the infrastructure credit blow-up, the market ignored them until the clean-up reached a tipping point. Once the stress was behind them and valuations were depressed, the stocks re-rated sharply even though the underlying businesses hadn’t transformed overnight. A similar inflection may be playing out here. The internal repair is also meeting a supportive backdrop. Over the past year, the government has nudged consumption through lower income taxes and GST tweaks, while the RBI has eased liquidity by cutting the cash reserve ratio. Loan rates have already drifted down; the next phase—lower deposit rates—should trim funding costs and steady margins. As lower rates revive loan demand, the industry could grow without stretching underwriting standards. And this tailwind is arriving just as these once-troubled lenders have strengthened their balance sheets, creating a timely opening for foreign capital to come in. How the five lenders are rebuilding themselves Here’s a closer look at what’s improving inside these lenders and what global investors are betting on. IDFC First Bank IDFC First Bank’s legacy stress originated in the infrastructure-heavy corporate loan book it inherited from its pre-merger structure. This book kept pressure on asset quality and profitability for several years, and while the bank gradually wound it down, the retail engine it was building in parallel also faced setbacks. First due to Covid-era disruptions and later because of the microfinance portfolio stress, which spiked credit costs again. Through all these phases, management stayed consistent with its strategy: grow a granular retail and MSME franchise, strengthen the deposit base and build a steady, predictable pre-provision operating engine. That approach worked. The bank’s deposit franchise expanded every year, retail now dominates the book, and its pre-p

This article was originally published on November 22, 2025.