Banking Sector Reforms in India Since 1991

The Indian banking system underwent major reform after 1991 to move away from financial repression, weak asset quality and heavy state control. The reform process focused on lowering statutory pre-emptions, improving prudential regulation, strengthening recovery mechanisms and widening competition in banking.

Pre-1991 Background

• Financial repression: Before 1991, banks operated under high reserve requirements, directed credit and interest rate controls.
• High CRR and SLR: A large part of bank deposits was locked into the Cash Reserve Ratio and Statutory Liquidity Ratio, leaving limited funds for lending.
• Weak profitability: Administered interest rates and political interference reduced efficiency, asset quality and competitiveness.
• Need for reform: The 1991 balance of payments crisis made banking modernization necessary for stabilization and credit expansion.

First Generation Reforms: Narasimham Committee I (1991)

The Committee on the Financial System, chaired by former RBI Governor M. Narasimham, submitted its report in November 1991. It laid the foundation for market-oriented banking, operational autonomy and restoration of financial health.

• Lower statutory pre-emptions: The committee recommended reducing the SLR from 38.5% to 25% in phases.
• CRR reduction: It proposed lowering the CRR from 15% to 3–5% to release more funds for productive lending.
• Better liquidity: Reduction in reserve requirements increased loanable resources and improved banks’ interest-earning capacity.
• Interest rate deregulation: RBI gradually deregulated deposit and lending rates, allowing banks greater pricing freedom.
• Risk-based lending: Banks gained the ability to fix lending rates above a prime lending rate based on risk assessment.
• Prudential norms: In April 1992, IRAC norms were introduced for Income Recognition, Asset Classification and Provisioning.
• Asset classification: Assets were classified as Standard, Sub-standard, Doubtful and Loss assets.
• Capital adequacy: Basel I-based Capital Adequacy Ratio norms of 8% against risk-weighted assets were mandated.

Competition, Recovery and Institutional Changes

• New private banks: RBI issued guidelines in January 1993 allowing new private sector banks, ending the earlier dominance of public sector banks.
• Foreign bank expansion: Foreign banks were allowed to expand branch networks and enter joint ventures with Indian partners.
• Debt recovery law: Parliament enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
• Special tribunals: The law created Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for faster recovery.
• Public sector banks: The reforms also pushed banks toward greater efficiency, better technology use and more competitive practices.

Second Generation Reforms: Narasimham Committee II (1998)

The Committee on Banking Sector Reforms, also headed by M. Narasimham, submitted its report in April 1998. The focus shifted to stronger financial infrastructure, capital adequacy, governance and non-performing asset management.

• Higher capital standards: The committee recommended raising the Capital to Risk-Weighted Assets Ratio (CRAR) from 8% to 9%.
• Risk weights: Risk weights were introduced for government securities to reflect sovereign market risk more accurately.
• Narrow banking: Weak public sector banks with high NPAs were advised to park funds in risk-free government securities.
• NPA target: The committee aimed to reduce gross NPAs of commercial banks to 3% by 2002.
• Asset Reconstruction Companies: ARCs were suggested to take over bad loan portfolios from bank balance sheets.
• SARFAESI link: This recommendation later led to the SARFAESI Act, 2002.
• Regulatory separation: The committee wanted the RBI’s dual role as regulator and owner of public sector banks to be separated.
• RBI equity transfer: The RBI transferred its equity in State Bank of India, National Housing Bank and NABARD to the central government.
• Board for Financial Supervision: The BFS was set up within the RBI in 1994 to improve oversight.

Modern Structural and Institutional Reforms

• Asset Quality Review: RBI launched the mandatory AQR in 2015 to expose hidden NPAs and improve transparency.
• Insolvency and Bankruptcy Code: The IBC was enacted in 2016 to create a time-bound, creditor-in-control resolution process.
• Bad bank structure: National Asset Reconstruction Company Limited (NARCL) was created in 2021 to aggregate and resolve stressed debt.
• Bank mergers: Public Sector Banks were consolidated from 27 in 2017 to 12 in 2020.
• Indradhanush Plan: Launched in 2015, it covered Appointments, Board of Directors, Capitalization, De-stressing, Empowerment, Framework of Accountability and Governance Reforms.
• BBB to FSIB: The Banks Board Bureau, set up in 2016, was restructured into the Financial Services Institutions Bureau in 2022.
• Specialized banks: Following Nachiket Mor Committee recommendations, RBI introduced Payments Banks and Small Finance Banks.
• UPI: The Unified Payments Interface, launched by NPCI in 2016, transformed retail digital payments.
• Financial inclusion: Under PMJDY, over 50 crore basic savings bank accounts were opened.

Major Reform Committees at a Glance

Key Prelims Takeaways

• 1991 reforms: Banking reforms were a core part of the post-crisis economic restructuring.
• CRR and SLR: Reduction in statutory pre-emptions was meant to free resources for credit creation.
• IRAC norms: Income recognition, asset classification and provisioning norms were introduced in 1992.
• Basel I capital: Public sector banks were required to meet 8% capital adequacy against risk-weighted assets.
• DRTs/DRATs: These bodies were created under the 1993 recovery law for faster debt recovery.
• NPA resolution: ARCs, AQR and IBC are key milestones in stressed asset resolution.
• Digital and inclusion push: PMJDY and UPI marked the shift toward universal financial access and digital payments.