For enabling three-tier banking system in India, the central government is likely to revisit the nearly two-decade old Narasimham Committee’s recommendation. The government is likely to undertake consolidation approach while considering capitalising of banks.
In 1998, a committee headed by the former Reserve Bank of India (RBI) governor M Narasimham was formed to review financial sector reforms. The committee had proposed a three-tier banking structure. This would involve having three large banks of international size, eight to 10 national banks and a large number of regional banks.
As a matter of fact, the committee had recommended that the international-sized banks should be created through the merger of two strong banks and cautioned that large banks should not be merged with weak banks.
“If a borrower wanted to raise Rs 10,000 crore, he would go to one of the large banks,” said Arjun Meghwal, minister of state for finance.
The government had earlier notified that it would invest capital only into well-managed banks. This gave rise to a near crisis for weak banks that have been placed under watch by the RBI under its prompt corrective action (PCA) scheme.
“As many have pointed out, it is not clear that we need so many public sector banks. The system could be better off if they are consolidated into fewer but healthier banks,” said the RBI’s governor Urjit Patel in a speech in New York in April.
“Some of the banks could be merged as a quid pro quo for capital injection by the government,” said Patel.