Banking Reforms — Historical and Recent

5.1 Narasimham Committee Reports (1991 and 1998)

The M. Narasimham Committee on Financial System produced two landmark reform blueprints that shaped modern Indian banking.

First Narasimham Committee (1991):

• Deregulate interest rates — move from administered to market-determined rates
• Reduce CRR and SLR from very high levels (then: CRR 15%, SLR 38.5%)
• Introduce IRAC norms — defining NPAs and asset classification
• Establish Asset Reconstruction Companies
• Partial deregulation of bank entry — new private banks allowed (HDFC Bank, ICICI Bank, Axis Bank — the "new generation" private banks of 1994)
• Reduce branch licensing requirements for PSBs

Second Narasimham Committee (1998):

• Capital adequacy: Move to Basel I norms (8% CRAR); later Basel II, III
• Consolidation: Merge weak PSBs into larger entities
• Narrow banking: Ring-fence weak banks by limiting them to safe investments
• Development Finance Institutions (DFIs): Convert to banks or wind down (IDBI converted to bank 2004)
• Recapitalisation of PSBs to meet Basel standards

5.2 Major Banking Reforms Post-2014

Differentiated Banking Licences (2014–15):

• Small Finance Banks (SFBs): Serve financially excluded segments — MFIs, agriculture, small businesses. 10 initial licences in 2015; now 12 SFBs.
• Payments Banks (2015): Mobile-centric narrow banks; accept deposits up to Rs 2 lakh; no lending; 11 initial licences (some revoked/surrendered).

Bank Merger Programme (2017–2020):

The consolidation reduced fragmentation and created "banks of scale" comparable to global peers:

• SBI + 5 associate banks + Bharatiya Mahila Bank (2017) — SBI became a top-50 global bank
• Vijaya + Dena → Bank of Baroda (2019)
• 10 PSBs consolidated into 4 in April 2020: OBC + United Bank → PNB; Andhra + Corporation + Union Bank → Union Bank of India; Allahabad Bank → Indian Bank; Syndicate Bank → Canara Bank
• Result: 27 PSBs reduced to 12 PSBs (2020)

Other Key Post-2014 Reforms:

• EASE Framework (Enhanced Access and Service Excellence): Annual reform index for PSBs covering digitisation, credit delivery, governance, and HR. Now in EASE 5.0 phase.
• Prompt Corrective Action (PCA) Framework: RBI places financially weak banks under PCA — restricts dividend, lending, and branching until capital ratios improve. Multiple PSBs (YES Bank, Punjab & Sind Bank, Indian Overseas Bank) were placed under PCA at various points.
• YES Bank Crisis (2020): YES Bank was placed under moratorium (5 March 2020). RBI orchestrated a rescue — SBI and consortium of private banks infused Rs 10,000 crore. This was the first-ever resolution of a large private bank under RBI/government intervention without using IBC.

5.3 NBFC Regulation — IL&FS Crisis and Beyond

IL&FS Crisis (2018): Infrastructure Leasing & Financial Services — India's largest infrastructure NBFC — defaulted on Rs 91,000 crore of debt in September 2018, triggering a liquidity crisis for the entire NBFC sector (affecting Dewan Housing Finance/DHFL, CCD, and Yes Bank).

RBI Response (2019–2021):

• Scale-Based Regulation (SBR) framework (2021): NBFCs classified into 4 layers (Base/Middle/Upper/Top) based on size and systemic risk
• Mandated core investment companies (CICs) to register with RBI
• Enhanced liquidity norms for NBFCs
• Introduced prompt corrective action norms for larger NBFCs

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