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-provision operating profit—what it earns before putting aside funds for future bad loans—has grown steadily, giving it the ability to absorb shocks.

This improvement recently drew Rs 7,500 crore of foreign capital—Warburg Pincus picked 9.8 per cent and Abu Dhabi Investment Authority 5.1 per cent in the bank. Management says the infusion will accelerate growth, reinforce capital buffers and help scale the bank sustainably as credit demand strengthens.

Sammaan Capital

Sammaan Capital, formerly Indiabulls Housing Finance, faced legacy stress from its earlier dependence on risky wholesale real-estate lending and large-ticket developer financing. After the IL&FS crisis triggered funding pressure and credibility concerns, management rebuilt the franchise around retail mortgages, affordable housing and MSME loans against property, adopted an asset-light co-lending model, rebranded the company and strengthened governance. The NBFC has witnessed a rising retail mix, improved provisioning and stabilising gross non-performing assets (GNPA) trends—evidence that the clean-up is progressing.

These shifts have attracted International Holding Company’s Rs 8,850 crore investment for a 41.2 per cent stake, which management has called ‘transformational’ for growth and governance.

While collections in the legacy book are improving and management expects a full exit from this segment in a few years, one concern remains: the company has raised Rs 6,040 crore over the past five years (excluding the latest infusion). Although this supports capital buffers and growth, this aggressive fundraising raises doubts about whether it’s being done in preparation for future losses. If not, a growing capital base still risks depressing ROEs.

Manappuram Finance

Manappuram Finance’s challenges stemmed from diversification into microfinance and vehicle finance, where delinquencies rose sharply during industry-wide stress. These non-gold portfolios created earnings volatility and pushed up provisioning requirements, even though the core gold-loan business itself remained dominant, stable and consistently profitable. In response, management tightened underwriting in the non-gold segments and strengthened provision buffers.

Despite these hiccups, Manappuram continued to deliver similar growth rates and ROEs as its larger peer, Muthoot Finance. However, it traded at roughly half of Muthoot’s price-to-book valuation, despite comparable fundamentals.

This valuation gap and a lack of succession plans likely set the stage for Bain Capital’s entry. Bain is acquiring 18 per cent for Rs 4,385 crore, with an open offer that could increase its stake to 42 per cent, a move the company says will support governance, scale and the next phase of growth.

Yes Bank

Yes Bank’s troubles came from years of aggressive corporate lending, weak risk controls and governance failures that ultimately pushed the bank to the brink in 2020, requiring a rescue led by SBI and other domestic lenders. Since then, management has executed a multi-year rebuild: transferring Rs 48,000 crore of stressed assets to JC Flowers Asset Reconstruction, strengthening capital buffers and shifting the business mix sharply toward granular retail and MSME lending. Slippages have moderated, recoveries have improved and the balance sheet is materially more stable today.

Earlier, Carlyle and Advent together infused Rs 8,898 crore, helping restore its capital buffers. But the more significant milestone came recently when Japan’s Sumitomo Mitsui Banking Corporation (SMBC) acquired a large stake—primarily buying SBI’s shares—to become Yes Bank’s largest shareholder. This move signals not just foreign interest, but a global bank’s long-term commitment to expanding its India presence.

RBL Bank

RBL Bank’s challenges stemmed from pockets of high-risk lending, particularly micro-banking, credit cards and certain unsecured retail segments, which led to elevated NPAs and regulatory scrutiny. Growth slowed as the bank tightened underwriting, increased provisioning and began rebalancing its portfolio toward secured retail and MSME lending.

The breakthrough came with Emirates NBD, the UAE’s second-largest bank, committing $3 billion (Rs 26,580 crore) for a 60 per cent stake via a preferential allotment at Rs 280 per share. Management said the partnership has more than doubled the bank’s net worth and it will accelerate expansion in secured retail and corporate lending and bring global-grade technology, products and risk-management capabilities to RBL’s platform.

So should investors simply buy this troubled basket?

There is a clear pattern here. Each of these lenders went through a painful phase, tightened risk, repaired balance sheets and saw valuations compress sharply. Now, each has attracted serious foreign capital that is explicitly being framed as growth and transformation money rather than emergency lifelines. If the clean up is genuine and underwriting stays conservative, the combination of macro tailwinds, normalising credit costs and foreign sponsors can deliver powerful share price rerating.

But the risks are just as real. Culture does not change overnight and some of these franchises still have to prove that their new business mix can withstand the next credit cycle. Execution mistakes or fresh asset quality surprises can quickly erode the benefits of the new capital. This is not a low-risk way to play the banking theme.

There is a cleaner way to ride the same theme

There is another option. One that combines the positives of this trend, without most of the historical baggage.

At Value Research Stock Advisor, we have recommended a bank that has no legacy blow-ups and has long been known for its conservative underwriting, and now has a new leadership team more willing to chase growth. It too has attracted a major foreign investor, but in this case, the capital is clearly for expansion, not repair. The stock still trades at reasonable valuations for its quality.

In other words, you can participate in the foreign capital and banking growth story through a cleaner, better anchored franchise, rather than betting only on the most troubled names. For the details of that bank and the full investment case around it, join Stock Advisor today.

Find our recommended bank here

Also read: Small banks for big returns

This article was originally published on November 22, 2025.