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Authored By- Venya Garg





This write-up describes the banking sector reforms along with their impact on the economic growth of India. Starting from the nationalization to the committees constituted for the reforms in the banking sector have provided much development of the banks. Firstly in the nationalization process one of the aims was to increase the branches of the banks in the rural areas also. But, the less population in a single bank left the idea shattered. Then the Narasimham Committee I, submitted its report in the year 1991 which discussed about reducing the cash reserve ratio, the statutory liquidity ratio, the non performing assets among others. Then a second committee to look into the banking sector can to recommend changes for the growth of this sector was constituted which is generally termed as the Narasimham Committee II. It also provided many suggestions which to a great extent were adopted by the central bank, other banks and the government. The changes under the latter committee revolved around the capital adequacy ratio, the use of capital market, the use of technology, detecting and reducing the non performing assets among others. The non performing asset hinders the growth of a country’s economic progress. The money becomes stagnant and it is not able to be utilized in the productive or useful channel which helps in a country’s progress. Thus, the banks are liberalized, privatized and globalized to a great extent.



Banking is a vital function performed in an economy. The mobilization of money for its productive use is very important for the growth of an economy. This function is being performed in India from ancient times. According to many ancient texts, there had been the existence of the operation of taking money and giving it to someone in need at an interest rate. The interest rate was also stated by many distinguished personalities. Generally, the interest rate was fifteen percent for one year, which was widely used. According to some, the interest rate was not inflicted by considering the risk involved. However, it was inflicted by taking into consideration the caste to which a person belonged to. As for instance, a person belonging to the Brahmin caste was being charged with an interest rate of two percent in one month, person belonging to the Kshatriya caste was being charged at three percent in one month, and similarly to the Vaishyas and Shudras at four and five percent of the rate of interest, respectively, for a time period of one month. Yet, for some, the rate of interests were to be determined in accordance with the danger or the risk associated with the type of work, as for instance, if there is a person who just has to take product from one place to another for selling without any risk involved will have to pay lesser rate of interest to the person who has to cross some river or woods to sell his product. It may be said that in the earlier or ancient times the caste system was the controller of all the banking activities in India. To tackle the instances of reduced or non- payment of the principal amount or the interest, many distinguished scholars have prescribed certain punishments. According to some, the king has the authority to inflict any kind of punishment for the payment of money whether morally correct or not. Some distinguished scholars mentioned that if the person who took the loan and has died then the burden shifts to their next generation. Also, instances of gender discrimination may also be seen in the payment of the loans with interest, if a wife took the loan then the husband was under obligation to pay back the amount, however, when the husband took the loan then the wife, if denied this act of her husband, was under no obligation to pay back the amount. This was a very complex and a chaotic situation, for which reforms were must needed.


Nationalization of the Banks:

During the arrival of the nineteenth century three banks named as the bank of Madras, bank of Calcutta and the bank of Bombay came into the existence. Further, in some early twentieth century these banks came to be merged, for the formation of the Imperial Bank of India which was further changed to the State Bank of India[1]. The central bank of India which is the Reserve Bank of India began its operations in the year nineteen thirty five and was nationalized in the year nineteen forty nine. The twentieth century in India witnessed much nationalization of the banks, in the year nineteen sixty nine and nineteen eighty saw fourteen and six nationalization of banks, respectively. The banks were mainly nationalized to make this systematically reach to all the areas of the country especially to the agrarian or the rural parts of India, which led to the inauguration of many newly, opened branches. Some of the banks which were nationalized included the Dena Bank, the Punjab National Bank, et cetera. Also, being a welfare State, India focusing on the rural society too, nationalized the banks to increase their reach. The inauguration of the new branches led to a decrease of the number of people fulfilling their demands from one bank i.e., as the branches of the banks spread so as the people coming in a single bank branch decreased.  


Number of Branches







Figure 1: Graph showing the growth in braches of the commercial banks in rural areas, urban areas and the total branches (including semi urban areas and metropolitan areas).






From the above figure 1 it may be seen that after the nationalization of some banks in the year 1969 the number of branches increased to a greater extent in the rural areas than the urban areas. Before nationalization there were one thousand four hundred and forty three branches in rural areas which increased to thirty thousand one hundred and eighty five in the year 1985 and in the urban areas growth is from one thousand nine hundred and eleven to six thousand five hundred and seventy eight[3].


The Narasimham Committee Report I:

In the years of nineteen eighties, the banking system of India was facing many challenges. Problems of low profitability, high statutory liquidity ratio and cash reserve ratio, poor administration, high non- performing assets, non- disclosure; balance of payment crisis engulfed the banking and the economic system of India. The Narasimham Committee came to the rescue for recommending in matters related to the financial system in India. The banks indeed showed some growth in terms of the geographical spread but their effectiveness, profitability and many such positive factors were lost in the banking system near the nineteen eighties. In the year 1991 only, the new economic policy was adopted (liberalization, privatization and the globalization). The adjudicatory mechanism, credit information system and a banking stencil in terms of hierarchy were also provided in this report. Some of the major recommendations which were propounded in this report as well as the impacts are as follows:



The categories to put the funds (taken by the people) were recommended to be changed for proper disclosure (which actually happened) as follows: the standard, the sub- standard (maximum two years has elapsed since announcement of the non performing asset), the doubtful (more than two years of the non performing asset) and the loss (loss known, however, given up on) assets[4].

The banks under the private sector calculated their non performing assets according to the earlier categories (out of all the assets provided to the people in need) till the month March of the year 1992 = 14.5 %, however, till the month of March in the year 1993 was 23.2 %[5].

The report stated that the function or objective of the statutory liquidity ratio is not deemed to be financing the public sector. The report, therefore, recommended that the statutory liquidity ratio should be lowered down and that to in a successive manner to also lower down the fiscal deficit.

Statutory Liquidity Ratio in the month of June of the year 1985 was approximately thirty six per cent which grew to thirty eight in the early 1988 and then afterwards fell to twenty five percent in the year 1997[6].

Also, the cash reserve ratio was also suggested to be lowered down. It was also suggested that the regulating structure in the interest rules should be liberalized.

The cash reserve ratio on twenty sixth of the month of October in the year 1985 was approximately nine percent, however, by third of the month of November in the year 2001 it came down to approximately six percent; certain liberalization in the fixing of the interest rates was also brought up[7].


The Narasimham Committee Report II:

Another committee was set up in the year 1992 also called by the name of the banking sector reform committee, which was basically to look into the reforms in the banking sector and was also bestowed with the work of recommending further changes that may be and should be brought for the effective functioning of the banking system in India. Some of the recommendations and the reforms which are brought because of the report of this particular committee are as under:



The committee stated that with growth and the setting up of more and more banks, increase in the competition, the banks needs to be prepared and the therefore the capital adequacy should be included within its ambit both the credit and the market risks.

In the ambit of non statutory liquidity ratio investments, market risks were brought up.

The committee members were of the view that the minimum of the capital adequacy ratio should be increased and that to in a phased manner without sudden shocks.

The minimum level of the capital adequacy ratio was increased from approximately eight per cent to nine per cent because the higher the capital adequacy ratio the safer the entity.


The committee’s point of view was with respect to the public sector banks that they should be allowed in the arena of the capital markets not only of the India but also of the foreign to lessen the burden on the government.

Banks have been granted permission to step their feet in the arena of the capital market.

The committee also recommends that if the non performing asset is in the category of sub- standard asset for a period of eighteen months, initially, be termed as a doubtful asset. The time period reduction should also be carried via different phases and not at once.

The banks were permitted to reduce such time period in different phases.

The money which is given in the form an advance and guaranteed via the government when becomes non performing are not counted as non performing asset according to the committee. Therefore, they are of the view that they should also be counted in the non performing asset or where for some reasons, they cannot be counted as such then they should be categorically told about, they should not be hidden.

The money which is given in the form of an advance by the government at the state level and is not paid back even in a couple of quarter, for such sum of money some rules have been laid down.

The Committee believes that the non performing assets which hampers a country’s economic progress and must be decreased in different phases and eventually the net of these assets must reach at nil. Also, the committee further states that such a thing could not be achieved unless there are some severe rules and regulations governing their detection and reduction.

The central bank of India along with the Indian banks has taken many measures for the reduction of the non performing assets. The banks are directed to work in such a manner and with such a procedure through which their risk assessment and tackling with such risks becomes easy for the banks. (The Insolvency and the Bankruptcy Code of 2016 was also enacted to deal with the problems of the non performing assets which to a great extent have proved to be a successful legislation).

The Committee also recommended the concept of merger for the creation of bigger and strong entity with proper facilities for the workers.

Mergers have become an important part of the economic growth.





Therefore, starting from the nationalization to the liberalization, privatization and globalization the banking sector has grown to a much extent. From the clutches of the central bank, the banks in India has realized their potential and are now trying to work and stand up on its own. Now, the aim of the government is seen as being inclined towards privatization of the banks to make the banking sector more and more viable and to avoid the presence of any weak bank. The aim is also in reducing the non performing assets of the bans which hampers the free flow of money into the useful channels. Now, the banks have much liberty to go on according to their rates of deposit, et cetera. The use of technology for easy management of the banking activities is another milestone of the banking sector reforms. The reduction in the cash reserve ratio and the statutory liquidity ratio has enable the banks to utilize more money for the growth of the economy of the country. Thus, the reforms have allowed to the banks to be more flexible and less afraid.



The economy of India can reach to its maximum if the non performing assets are removed. Thus, a robust system of detecting and removing such assets will be helpful. The digitalization of maximum things, strong privacy of the customers and the transparency in the working of the banks could be pondered upon.



  • The State Bank of India Act 1935.
  • ‘Evolution of Banking in India’ (Reserve Bank of India, 04 September 2008) accessed 26 February 2022.
  • Reserve Bank of India, ‘Report of the Committee on the Financial System’ (November 1991).
  • Reserve Bank of India, Handbook of Statistics on Indian Economy (2002).
  • ‘Committee on Banking Sector Reforms (Narasimham Committee II)- Action taken on the recommendations’ (Reserve Bank of India)accessed on 15 April 2022.



[1] The State Bank Of India Act 1935.

[2] ‘Evolution of Banking in India’ (Reserve Bank of India, 04 September 2008) accessed 26 February 2022.

[3] ibid.

[4] Reserve Bank of India, ‘Report of the Committee on the Financial System’ (November 1991).

[5] ibid.

[6] Reserve Bank of India, Handbook of Statistics on Indian Economy (2002).

[7] ibid.

[8] ‘Committee on Banking Sector Reforms (Narasimham Committee II)- Action taken on the recommendations’ (Reserve Bank of India)accessed on 15 April 2022


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