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The banking sector serves as the financial backbone of the Indian economy, facilitating credit flow, capital formation, and financial stability. Reforms in this sector are an ongoing process aimed at enhancing efficiency, transparency, and stability while addressing systemic challenges like Non-Performing Assets (NPAs) and governance issues.

Foundational Reforms: The Narasimham Committees

The evolution of modern Indian banking began with the landmark recommendations of the Narasimham Committee I (1991) and II (1998), which moved the system from an "administered" to a "market-driven" framework.

The committees recommended a phased reduction in the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) to unlock more funds for commercial lending. Banks were given the autonomy to determine interest rates on deposits and loans based on market demand and supply. Standardized norms for identifying bad loans (NPAs) were introduced, requiring banks to set aside capital against potential losses. Licensing of new private sector banks (e.g., ICICI, HDFC) was permitted to foster competition and technological innovation.

Resolving the "Twin Balance Sheet" Problem (Post-2014)

The modern era of reforms focuses on cleaning up bank balance sheets and strengthening Public Sector Banks (PSBs).

  • Asset Quality Review (AQR): Initiated by the RBI in 2015, the AQR exercise aimed to assess the true quality of assets in banks. It ended the practice of "evergreening" loans, forcing banks to identify and provision for stressed assets honestly, leading to greater transparency in reporting.
  • Insolvency and Bankruptcy Code (IBC), 2016: This landmark legislation provides a time-bound and effective framework for the resolution of NPAs. By shifting power from debtors to creditors, it facilitates the revival or liquidation of stressed businesses and improves India’s "credit culture".
  • Recapitalization of PSBs: To prevent a collapse during the provisioning phase, the government injected massive capital into PSBs. This strengthened their capital base, improved financial health, and ensured they met regulatory capital adequacy requirements.

Structural Revamp: Mission Indradhanush & EASE

To rejuvenate PSBs, the government launched a comprehensive seven-pronged strategy known as Mission Indradhanush.

  • The Seven Pillars (A-G):
    • Appointments: Separation of the posts of Chairman and MD/CEO to improve board independence.
    • Bank Board Bureau (now FSIB): An independent body to select top-level management for PSBs.
    • Capitalization: Direct infusion of funds to meet Basel III norms.
    • De-stressing: Strengthening recovery mechanisms for bad loans.
    • Empowerment: Adopting a "no interference" policy to allow banks to work independently and professionally.
    • Framework of Accountability: New performance-based evaluation systems.
    • Governance Reforms: Strengthening the composition and functioning of boards.
  • EASE (Enhanced Access and Service Excellence): This common reform agenda for PSBs focuses on digital enablement, customer-centricity, and prudent lending. The latest iteration, EASE 8.0 (EASE₹ise), emphasizes:
    • Innovation: Designing specific products for gig workers, start-ups, and youth.
    • Risk & Resilience: Leveraging AI and Big Data for credit scoring and fraud prevention.
    • Digital Journeys: End-to-end digital assisted journeys for Retail and MSME loans.

Consolidation and Prudential Norms

  1. Mergers and Consolidation: The government merged 27 PSBs into 12 larger entities to create stronger, more resilient institutions with "scale and strength". This helps optimize resources and enhance governance and risk management practices.
  2. Prudential Norms (Basel III): Banks are required to maintain a Capital Adequacy Ratio (CAR) of at least 8%, with higher buffers for Domestic Systemically Important Banks (D-SIBs) like SBI, ICICI, and HDFC. This ensures banks have enough capital to absorb shocks during economic stress.
  3. Prompt Corrective Action (PCA): The RBI places weaker banks under the PCA framework, restricting their lending and dividend pay-outs until their financial health improves to prevent further bad lending.

Digital Transformation and Future-Ready Banking

  • Digital Public Infrastructure (DPI): India leads the world in digital transactions, with UPI being the centrepiece of the "DIGIDHAN Mission".
  • Differentiated Banks: To promote financial inclusion, the RBI licensed Payments Banks (e.g., India Post) and Small Finance Banks (SFBs) to serve small businesses and low-income groups.
  • NARCL (Bad Bank): The National Asset Reconstruction Company Limited was established to take over large stressed assets from banks, allowing them to focus on fresh lending.
  • Banking Laws (Amendment) Act, 2025: Recent reforms allow depositors to nominate up to four nominees per account and increase the threshold for "substantial interest" in shareholding for directors to ₹2 crores.

Inclusive and Cooperative Banking Reforms

  1. Urban Cooperative Banks (UCBs): To align UCBs with commercial standards, the RBI proposed stricter licensing criteria, including a minimum capital of ₹300 crores and a CAR above 12%.
  2. Financial Inclusion: Through the Pradhan Mantri Jan Dhan Yojana (PMJDY), the government has ensured universal access to banking services, supporting welfare schemes like MUDRA and priority sector lending.

Conclusion

While reforms have successfully brought the Gross NPA ratio down to record lows (2.1% as of late 2025), new challenges persist. Future focus remains on bridging the deposit-credit gap, managing unsecured retail lending risks, and fortifying cybersecurity as the sector becomes increasingly digital-first.