flowchart LR N1[Phase I: 1991-97<br/>Narasimham I] --> N2[Phase II: 1998-2008<br/>Narasimham II] N2 --> N3[Phase III: 2008 onwards<br/>Global crisis response] N3 --> N4[Phase IV: 2014 onwards<br/>Inclusion + IBC + IFC] style N1 fill:#FFEBEE,stroke:#C62828 style N4 fill:#E8F5E9,stroke:#2E7D32
62 Banking Sector Reforms in India
62.1 Why Reforms Were Needed
By the late 1980s, India’s banking sector was over-regulated, undercapitalised and burdened with non-performing assets. Pre-emptions for SLR + CRR exceeded 60 per cent of deposits, leaving little for productive credit. Productivity was low, profitability was thin, and the public banking system was dominated by directed lending (khan2022?; rbi2024?).
The 1991 BoP crisis triggered a comprehensive reform programme. The blueprint came from the Narasimham Committee — I (1991) and was deepened by Narasimham Committee — II (1998).
62.2 Phases of Banking-Sector Reform
62.3 Narasimham Committee — I (1991)
Set up in 1991 under M. Narasimham (former RBI Governor), the committee gave a 12-point reform agenda (khan2022?):
TipKey Recommendations of Narasimham I
| Area | Recommendation |
|---|---|
| Pre-emptions | Reduce SLR (then 38.5 %) to 25 %; CRR (then 15 %) to 3–5 % |
| Directed credit | Phase out concessional interest; reduce priority-sector target |
| Interest-rate liberalisation | Move from administered to market-determined rates |
| Capital adequacy | Adopt Basel I — 8 % CRAR by March 1996 |
| NPA classification | Adopt prudential norms based on income recognition and asset classification |
| Bank structure | Three- or four-tier structure: 3 large international banks, 8–10 national banks, local banks, RRBs |
| Government holding | Reduce GoI stake in PSBs |
| New private banks | Allow new private banks subject to safeguards |
| Branch licensing | Liberalise branch expansion |
| Computerisation | Modernise technology |
| Supervision | Strengthen banking supervision; create separate Board for Financial Supervision (BFS) |
| RRBs | Restructure or merge weak RRBs |
The reforms based on Narasimham-I (1992–97) included reduction of SLR/CRR, deregulation of interest rates, capital adequacy norms (Basel I), prudential NPA norms, and licensing of new private banks (HDFC, ICICI, Axis, IndusInd, Bank of Punjab, etc.).
62.4 Narasimham Committee — II (1998)
Set up in 1998 to review progress and recommend second-generation reforms (rbi2024?):
TipKey Recommendations of Narasimham II
| Area | Recommendation |
|---|---|
| Capital adequacy | Raise to 9 %; risk-based supervision |
| Asset quality | Reduce gross NPAs to 5 %, net NPAs to 3 % |
| Banking structure | Mergers among PSBs; create few large banks |
| Universal banking | Allow DFIs to convert to universal banks (ICICI, IDBI later did) |
| Asset Reconstruction Company | Set up to clean up bad loans |
| Technology | Computerisation, RTGS, electronic funds transfer |
| Tribunals | Strengthen Debt Recovery Tribunals |
| Functional autonomy | Reduce political interference in PSB management |
| Audit and accounting | International standards |
| Legal reforms | SARFAESI Act 2002; later Insolvency and Bankruptcy Code 2016 |
62.5 Khan Committee (1998)
Recommended universal banking — allowing DFIs to provide both short-term commercial banking and long-term development finance. ICICI converted to a universal bank in 2002; IDBI in 2004.
62.6 Reforms — Outcomes by Decade
TipKey Reform Outcomes by Decade
| Decade | Main outcomes |
|---|---|
| 1990s | SLR/CRR reduction, interest deregulation, Basel I, IRAC norms, new private banks |
| 2000s | Universal banking, RTGS (2004), NEFT (2005), SARFAESI (2002), Basel II |
| 2010s | Inclusion (Jan Dhan 2014), Bank licensing (2014–15 universal; SFB and PB 2015), Indradhanush plan (2015), Asset Quality Review (2015), IBC (2016), Demonetisation (2016), UPI (2016), Mergers (2017–20), Basel III, MPC (2016) |
| 2020s | NaBFID (2021), DICGC ₹5 lakh, e-Rupee (2022 pilot), digital lending guidelines (2022), Account Aggregator framework |
62.7 Indradhanush — 2015 Reform Plan
The Government of India’s Indradhanush (Rainbow) framework (2015) for PSB reform laid out a seven-point plan — the seven colours of the rainbow:
TipIndradhanush — Seven Points
| Point | Working content |
|---|---|
| A | Appointments — separation of CMD into Chairman and MD/CEO |
| B | Banks Board Bureau (BBB) — body to recommend appointments |
| C | Capitalisation — recapitalise PSBs |
| D | De-stressing PSBs — IBC and SARFAESI |
| E | Empowerment — autonomy in HR and decisions |
| F | Framework of Accountability — Key Performance Indicators (KPIs) |
| G | Governance reforms — Gyan Sangam, training |
62.8 Bank Mergers (2017–20)
Consolidation of public-sector banks reduced PSB count from 27 (in 2017) to 12:
- 2017 — SBI absorbed five associate banks and Bharatiya Mahila Bank.
- 2019 — Bank of Baroda merged with Vijaya Bank and Dena Bank.
- 2020 — Mega-merger of 10 PSBs into 4: PNB + OBC + UBI; Canara + Syndicate; Union + Andhra + Corporation; Indian + Allahabad.
62.9 Asset Quality Review and IBC
The Asset Quality Review (RBI, 2015) forced banks to recognise hidden NPAs, raising reported gross NPAs sharply (peaked above 11 per cent in 2018 for PSBs). The Insolvency and Bankruptcy Code 2016 set up a time-bound resolution framework — adjudication by NCLT, Insolvency Professionals (IPs), Information Utilities (IUs), and the Insolvency and Bankruptcy Board of India (IBBI).
62.10 Basel Framework
TipBasel Norms — Evolution
| Accord | Year | Key features |
|---|---|---|
| Basel I | 1988 | 8 % CRAR; credit risk only |
| Basel II | 2004 | Three pillars — minimum capital, supervisory review, market discipline; included operational risk |
| Basel III | 2010 (post-GFC) | Higher capital, leverage ratio, liquidity ratios (LCR, NSFR), counter-cyclical buffer, systemic-risk buffer |
| Basel IV | rolling | Standardised approaches replacing internal models for some risks |
In India, Basel III is being phased in; current minimum CRAR is 9 per cent, plus Capital Conservation Buffer of 2.5 % and Counter-Cyclical Capital Buffer (currently 0 %), plus an additional buffer for Domestic Systemically Important Banks (D-SIBs) — SBI, HDFC and ICICI in India.
62.11 Financial Inclusion
Major financial-inclusion initiatives:
TipMajor Financial-Inclusion Initiatives
| Initiative | Year | Purpose |
|---|---|---|
| No-frills account / BSBDA | 2005 / 2012 | Zero-balance basic accounts |
| Pradhan Mantri Jan Dhan Yojana (PMJDY) | 2014 | Universal account access |
| MUDRA / PMMY | 2015 | Micro-credit for entrepreneurs |
| Atal Pension Yojana | 2015 | Voluntary pension for unorganised |
| Pradhan Mantri Suraksha Bima Yojana | 2015 | Accident insurance |
| Pradhan Mantri Jeevan Jyoti Bima Yojana | 2015 | Life insurance |
| Stand-Up India | 2016 | Loans to women / SC / ST entrepreneurs |
| Aadhaar-enabled banking | onward | Biometric authentication |
62.12 Exam-Pattern MCQs
NoteEight-question set
Q1. Which of the following committees is not directly associated with banking-sector reforms in India?
A. Narasimham I and II B. Khan Committee C. Tarapore Committee D. Mandal Commission
Answer: D. The Mandal Commission dealt with reservations in services, not banking reforms.
Q2. Match each reform / event with its year:
| Reform | Year | ||
|---|---|---|---|
| (i) | Narasimham Committee — I | (a) | 2002 |
| (ii) | SARFAESI Act | (b) | 1991 |
| (iii) | Insolvency and Bankruptcy Code | (c) | 2016 |
| (iv) | DICGC limit raised to ₹5 lakh | (d) | 2020 |
A. (i)-(b), (ii)-(a), (iii)-(c), (iv)-(d) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q3. The Indradhanush (Rainbow) framework of 2015 consists of:
A. Five components B. Six components C. Seven components (A to G) D. Ten components
Answer: C. Seven components — A to G — for PSB reform.
Q4. Match each Basel accord with its key feature:
| Accord | Key feature | ||
|---|---|---|---|
| (i) | Basel I | (a) | LCR, NSFR, leverage ratio, counter-cyclical buffer |
| (ii) | Basel II | (b) | 8 % CRAR; credit risk only |
| (iii) | Basel III | (c) | Three pillars; operational risk added |
A. (i)-(b), (ii)-(c), (iii)-(a) B. (i)-(a), (ii)-(b), (iii)-(c) C. (i)-(c), (ii)-(a), (iii)-(b) D. (i)-(c), (ii)-(b), (iii)-(a)
Answer: A.
Q5. The Asset Quality Review (AQR) by the RBI was undertaken in:
A. 2002 B. 2008 C. 2015 D. 2020
Answer: C. The AQR — under Governor Raghuram Rajan in 2015 — forced banks to recognise hidden NPAs.
Q6. Which of the following is not an outcome of Narasimham Committee — I?
A. Reduction of SLR and CRR B. Adoption of Basel I (8 % CRAR) C. Licensing of new private banks D. Mandatory mergers of all PSUs
Answer: D. Mandatory mergers were not part of Narasimham-I; voluntary mergers came later (especially 2017–20).
Q7. Arrange the following major mergers / reorganisations in chronological order:
- BoB merged with Vijaya and Dena Bank
- SBI merged with five associates and Bharatiya Mahila Bank
- Mega-merger of 10 PSBs into 4
- ICICI converted to universal bank
A. (iv), (ii), (i), (iii) B. (ii), (iv), (iii), (i) C. (iii), (i), (ii), (iv) D. (i), (ii), (iii), (iv)
Answer: A. ICICI 2002 → SBI absorbs 5 associates 2017 → BoB-Vijaya-Dena 2019 → Mega-merger 2020.
Q8. Match each financial-inclusion initiative with its year:
| Initiative | Year | ||
|---|---|---|---|
| (i) | PMJDY | (a) | 2015 |
| (ii) | PMMY (MUDRA) | (b) | 2014 |
| (iii) | Stand-Up India | (c) | 2016 |
| (iv) | Atal Pension Yojana | (d) | 2015 |
A. (i)-(b), (ii)-(a), (iii)-(c), (iv)-(d) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
ImportantQuick recall
- Banking reforms triggered by 1991 BoP crisis. Blueprint: Narasimham I (1991), Narasimham II (1998).
- N-I: cut SLR/CRR; deregulate interest; Basel I 8 % CRAR; IRAC norms; new private banks.
- N-II: 9 % CRAR; mergers; universal banking; ARC; SARFAESI eventually.
- 2000s: RTGS 2004, NEFT 2005, SARFAESI 2002, Basel II.
- 2010s: PMJDY 2014, Mor Committee 2013, SFB/PB 2015, AQR 2015, IBC 2016, Demonetisation Nov 2016, MPC 2016, UPI 2016, Mergers 2017–20.
- Indradhanush 2015 (PSB reform): Appointments, BBB, Capitalisation, De-stressing, Empowerment, Framework of accountability, Governance.
- Basel: I (1988) 8 %; II (2004) three pillars + op risk; III (2010) LCR, NSFR, leverage, buffers.
- Indian CRAR: 9 % + CCB 2.5 % + CCyB + D-SIB buffer (SBI, HDFC, ICICI).
- Inclusion: PMJDY 2014, MUDRA / APY / PMSBY / PMJJBY 2015, Stand-Up India 2016.
- AQR 2015 under Rajan; PSB GNPA peaked > 11 % in 2018; IBC 2016 enabled time-bound resolution.