Japan’s Big Banks Find a New Growth Story in India’s Financial Sector

Japan’s largest banks are increasingly targeting India’s fast-growing financial sector to offset limited growth at home. Led by MUFG’s proposed Rs 40,000 crore investment in Shriram Finance, Japanese lenders are expanding through stakes in banks and NBFCs. Strong credit demand, rising incomes and global investor interest make India a strategic long-term growth market.

India’s banking and financial services industry is fast emerging as a key destination for Japan’s largest lenders, underscored by Mitsubishi UFJ Financial Group’s (MUFG) proposed investment of about Rs 40,000 crore in Shriram Finance.

If completed, the transaction would give MUFG a 20% holding in India’s second-largest non-banking finance company (NBFC). But the move represents much more than a single investment decision. It reflects a broader strategic shift by Japanese megabanks that are increasingly looking beyond their home market for scale, growth and sustained returns.

In recent months, Japanese capital has flowed into India’s financial sector at a noticeably faster pace. MUFG’s plan follows Mizuho’s long-awaited takeover of Avendus, Daiwa Securities Group’s third round of investment in Ambit, and Sumitomo Mitsui Banking Corporation’s $1.6 billion acquisition of a 20% stake in Yes Bank earlier this year. Together, these deals highlight a clear pattern: Japan’s largest financial institutions are making India a priority market.

For MUFG, the Shriram Finance transaction marks another attempt to establish a significant foothold in India’s shadow banking landscape. Last year, the group explored buying a sizeable stake in HDB Financial Services, the NBFC arm of HDFC Bank, but that effort did not materialise. Shriram Finance now offers a ready-made platform — a well-entrenched lender with strong positions in retail and vehicle finance — aligning neatly with MUFG’s long-term ambitions.

The proposed investment also builds on MUFG’s growing exposure to Indian financial services. In 2024, the group invested more than $338 million in DMI Finance Private and later raised its ownership to 20%. These moves underline MUFG’s preference for partnering with established local players instead of building operations from scratch.

What makes the Shriram Finance deal particularly notable is its size and strategic intent. Valued at roughly $4.45 billion for a 20% stake, it would rank among the largest foreign investments in India’s NBFC sector. It also leaves the door open for deeper involvement over time. Through Shriram Finance, MUFG gains access to India’s expanding retail credit market, including commercial vehicles, two-wheelers, passenger cars and personal loans — segments closely linked to rising incomes and consumption.

India offers growth dynamics that Japan increasingly lacks. Credit demand in India continues to outstrip that of developed economies, supported by infrastructure spending, rising household incomes and a steadily formalising economy. Lending to individuals and small businesses remains robust, while overall credit penetration is still relatively low, providing ample room for expansion over the long term.

Japan’s domestic banking environment presents a stark contrast. The market is mature and dominated by three major players — MUFG, Sumitomo Mitsui Banking Corporation and Mizuho — which already serve most corporate and retail customers. An ageing population, declining demographics and subdued household borrowing have constrained growth prospects. Even after the Bank of Japan began raising interest rates following decades of ultra-loose policy, margins have remained under pressure and credit demand has shown little revival.

For many regional Japanese banks, these structural challenges have resulted in consolidation rather than expansion. Limited population growth and lagging digital capabilities have further narrowed opportunities at home.

As a result, overseas expansion has shifted from being optional to essential for Japanese banks. With limited scope to add customers or significantly grow loan books domestically, emerging markets have become critical to their future strategies. Markets like India, where financial inclusion is still expanding and demand for credit is rising, offer the scale and growth that Japan’s lenders now require.

Among emerging economies, India stands out. A growing middle class, sustained infrastructure investment and policy support for financial inclusion are driving demand across retail, MSME and corporate lending. For Japanese megabanks, India provides long-term exposure to consumption-led growth without the demographic headwinds that weigh on their home market.

This surge of Japanese interest is unfolding at a time when India’s financial sector has already captured global attention. After decades of limiting foreign participation, Indian banks and financial institutions are now drawing significant international capital. Even as overall foreign direct investment has moderated, inflows into financial services have risen sharply. Bloomberg data show that deals worth nearly $15 billion have been concluded this year alone.

Investors span the globe — from Dubai’s Emirates NBD and Japan’s SMBC to U.S.-based Blackstone and Switzerland’s Zurich Insurance. Blackstone’s recent announcement of a $705 million investment for a 9.9% stake in Federal Bank, making it the bank’s largest shareholder, is the latest example of this trend.

The growing presence of Japanese banks in India comes amid this intense global competition. Far from being early movers, they are entering a market that has already become one of the most attractive destinations for international financial capital — a testament to India’s rising stature in the global banking and financial services landscape.