Banking sector reforms in India have been primarily driven by specialized committees appointed to modernize financial infrastructure, ensure stability, and promote inclusion. The most influential among these are the Narasimham Committees, which laid the foundation for a market-oriented banking system.
1. Narasimham Committee-I (1991)
Also known as the Committee on Financial System, it aimed to introduce operational flexibility and professionalism into banking.
- SLR and CRR Reduction: Recommended reducing high reserve ratios that “locked” bank resources for government use.
- Interest Rate Deregulation: Suggested eliminating government control over interest rates.
- Phasing out Directed Credit: Recommended ending the mandate to provide credit to specific sectors at confessional rates.
- Structural Reorganization: Proposed reducing the number of public sector banks through mergers to increase efficiency.
2. Narasimham Committee II (1998)
Known as the Banking Sector Committee, it focused on strengthening the system and handling bad loans.
- Narrow Banking: Suggested that weak banks with high Non-Performing Assets (NPAs) should invest only in short-term, risk-free assets.
- Asset Recovery: Its recommendations led to the introduction of the SARFAESI Act, 2002, and the formation of Asset Reconstruction Companies (ARCs).
- RBI Role: Felt the RBI should be a regulator only and not own stakes in banks.
- Capital Adequacy: Proposed raising the Capital Adequacy Ratio (CAR) norms to make banks more resilient.
3. Nachiket Mor Committee (2013)
Formally known as the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, it prioritised financial inclusion.
- Niche Banking: This committee’s suggestions led to the creation of Payment Banks and Small Finance Banks (SFBs).
- Universal Access: Recommended that every Indian resident above 18 should have a full-service electronic bank account.
- Customer Protection: Proposed a unified Financial Redress Agency (FRA) to handle grievances across all financial products.
4. Urjit Patel Committee (2014)
This committee was formed to revise and strengthen the Monetary Policy Framework
- Inflation Targeting: Recommended that the RBI target inflation based on the Consumer Price Index (CPI) at 4% (with a +/- 2% margin).
- Monetary Policy Committee (MPC): Proposed that interest rate decisions be made by a dedicated committee rather than the RBI Governor alone.
- Standing Deposit Facility (SDF): Recommended the introduction of the SDF as a tool for liquidity management without requiring collateral.
Summary of Specialized Committees
| Committee | Key Reform / Outcome |
|---|---|
| Sivaraman (1979) | Establishment of NABARD for rural development. |
| Sukhamoy Chakraborty (1985) | Introduced the framework of monetary targeting |
| Usha Thorat (2014) | Processed applications for the first 10 Small Finance Banks. |
| Abhijit Sen | Revision of the Wholesale Price Index (WPI) series. |
To understand Banking Reform Committees: Think of the Indian banking system as a large, state-run athletic team from the 1980s.
- The Narasimham Committees were like head coaches who realized the team was slow and over-regulated. They told the players to drop the “heavy weights” (SLR/CRR), allowed them to compete in the private league, and taught them how to deal with “injuries” (NPAs) through specialized doctors (SARFAESI).
- The Nachiket Mor Committee was like a scouting program that realized many talented people in remote villages weren’t on the team. It created “Junior Leagues” (Payment and Small Finance Banks) to make sure everyone had a chance to play.
- The Urjit Patel Committee was like the team’s data analyst. It stopped the team from guessing how fast they should run and set a precise speedometer (Inflation target) to ensure they didn’t burn out or move too slowly.