Which of the following committees examined and suggested Financial Sector Reforms ?

1. The 1991 Economic Crisis and LPG Reforms (basic)

To understand why India’s banking system looks the way it does today, we must first travel back to the summer of 1991. At that time, India was facing its worst economic nightmare: a Balance of Payments (BoP) crisis. For decades, India had followed a model of heavy state control and limited trade. By 1991, a "double whammy" hit the economy. Internally, the government was spending far more than it earned (high fiscal deficit), and externally, our foreign exchange reserves had plummeted to just $0.9 billion—barely enough to pay for three weeks of essential imports like oil and medicine Nitin Singhania, Indian Economy, p.484.

The immediate trigger was the Gulf War (1990-91). As Iraq invaded Kuwait, international crude oil prices skyrocketed, ballooning India’s import bill. Simultaneously, nervous Non-Resident Indians (NRIs) began withdrawing their deposits from Indian banks. With the country's credit rating downgraded and no one left to lend us money, India had to airlift its gold reserves to London and Switzerland as collateral for a loan from the IMF Nitin Singhania, Indian Economy, p.483. This crisis forced a total rethink of our economic DNA, leading to the New Economic Policy of 1991.

This policy introduced the famous LPG Framework, which fundamentally shifted the government's role from a "regulator" to a "facilitator":

• Liberalization: This ended the "License Raj." Most industries no longer needed government permission to start or expand. Compulsory licensing was abolished for all but 18 (now only 5) strategic sectors Nitin Singhania, Indian Economy, p.379.
• Privatization: The government began the process of disinvestment, reducing its stake in Public Sector Undertakings (PSUs) and allowing the private sector to take the lead in areas previously reserved for the state History, Class XII (Tamilnadu State Board), p.124.
• Globalization: India opened its doors to the world by devaluing the rupee to boost exports and encouraging Foreign Direct Investment (FDI) and Foreign Institutional Investors (FII) Nitin Singhania, Indian Economy, p.135.

This shift wasn't just about factories and trade; it meant that the banking sector—the heart that pumps money through the economy—also needed a massive overhaul to support this new, competitive, private-sector-led India. This set the stage for the landmark Narasimham Committee reforms.

Sources: Indian Economy, Nitin Singhania (ed 2nd 2021-22), Balance of Payments, p.483-484; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Economic Planning in India, p.135; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Industry, p.379; History, class XII (Tamilnadu state board 2024 ed.), Envisioning a New Socio-Economic Order, p.124

2. Structure of the Indian Banking System (basic)

To understand banking reforms, we first need to map out the structure of the Indian banking system. Think of it as a hierarchy where the Reserve Bank of India (RBI) acts as the regulator at the top. The most fundamental classification divides banks into Scheduled and Non-Scheduled banks based on their inclusion in the Second Schedule of the RBI Act, 1934 Nitin Singhania, Money and Banking, p.174. To be 'Scheduled,' a bank must satisfy the RBI that its affairs are not detrimental to depositors' interests and must maintain a specific level of paid-up capital and reserves Nitin Singhania, Money and Banking, p.175. While non-scheduled banks are rare today (limited to a few local area banks), scheduled banks enjoy the privilege of accessing RBI’s financial assistance like the Repo rate and Marginal Standing Facility (MSF), but they must strictly follow CRR (Cash Reserve Ratio) mandates Nitin Singhania, Money and Banking, p.174.

Under the umbrella of Scheduled Commercial Banks (SCBs), we find four major players based on ownership and focus:

• Public Sector Banks (PSBs): These are banks where the Government of India holds more than 51% stake. This includes the State Bank of India (SBI) and the Nationalized Banks (which were private banks taken over by the government in 1969 and 1980) Vivek Singh, Money and Banking- Part I, p.82.
• Private Sector Banks: Owned primarily by private individuals or corporations. We distinguish between 'Old' private banks (those that escaped nationalization due to their small size) and 'New' private banks like HDFC or ICICI that emerged after the 1991 reforms Nitin Singhania, Money and Banking, p.178.
• Foreign Banks: These are incorporated outside India but operate branches here, such as Citibank or HSBC Vivek Singh, Money and Banking- Part I, p.82.
• Regional Rural Banks (RRBs): Specialized banks focused on rural credit, co-owned by the Central Govt, State Govt, and a Sponsor Bank.

Feature	Scheduled Banks	Non-Scheduled Banks
Legal Status	Listed in 2nd Schedule of RBI Act, 1934	Not listed in the 2nd Schedule
RBI Borrowing	Entitled to borrow for regular banking needs	Cannot borrow from RBI for regular needs (except in emergencies)
Forex Dealing	Allowed to deal in Foreign Exchange	Generally not allowed Vivek Singh, Money and Banking- Part I, p.81

Sources: Indian Economy, Nitin Singhania (ed 2nd 2021-22), Money and Banking, p.174-175, 178; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.81-82

3. Monetary Policy Tools: SLR and CRR (intermediate)

To understand the mechanics of Indian banking, we must first look at how the Reserve Bank of India (RBI) ensures that banks don't lend out every single rupee they receive. If a bank lent out all its deposits, it would have nothing left if a customer showed up to withdraw their savings. To prevent this and to control the total money supply in the economy, the RBI uses two primary reserve requirements: the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR). These ratios act as a fundamental limit on the amount of credit banks can create Macroeconomics (NCERT class XII 2025 ed.), Money and Banking, p.40.

While both tools lock away a portion of a bank's deposits, they differ significantly in where the money is kept and what form it takes. The CRR is a specific percentage of a bank's Demand and Time Liabilities (DTL) that must be kept with the RBI in the form of liquid cash. In contrast, the SLR is a percentage of Net Demand and Time Liabilities (NDTL) that the bank maintains with itself in the form of safe, liquid assets like gold or government-approved securities Indian Economy, Nitin Singhania (ed 2nd 2021-22), Money and Banking, p.169-170. This distinction is vital for a bank's bottom line: banks earn no interest on the cash they park with the RBI for CRR, but they do earn interest on the government securities they hold to meet their SLR requirements.

Feature	Cash Reserve Ratio (CRR)	Statutory Liquidity Ratio (SLR)
Kept with...	The Reserve Bank of India (RBI)	The Bank itself
Form	Only Cash	Cash, Gold, or Govt. Securities
Returns	Earns 0% interest	Earns interest (from securities)

Historically, these tools were not just for safety; they were tools of "financial repression." Before the 1991 economic reforms, the government used high reserve ratios to force banks to lend to the public sector. By 1991, CRR had climbed to 15% and SLR to a massive 38.5% Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking - Part II, p.126. This meant over half of every rupee deposited was unavailable for commercial lending, leading to bank inefficiency. The Narasimham Committee (1991) marked a turning point, recommending that SLR and CRR be reduced and used primarily for prudential requirements (bank safety) rather than as a tool for the government to finance its own deficit Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking - Part II, p.127-128.

Sources: Macroeconomics (NCERT class XII 2025 ed.), Money and Banking, p.40; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Money and Banking, p.169-170; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking - Part II, p.126-128

4. Tax Reforms and the Raja Chelliah Committee (intermediate)

To understand banking reforms, we must look at their twin: Fiscal Reforms. In 1991, while the financial sector was being overhauled, the government also realized that the tax system was broken—rates were too high, compliance was low, and the system was overly complex. To fix this, the government appointed the Tax Reforms Committee, popularly known as the Raja Chelliah Committee. The philosophy was simple but revolutionary for India: the government should collect more revenue by broadening the tax base rather than by increasing tax rates. Indian Economy, Vivek Singh, Inclusive growth and issues, p.276. This shift was crucial for the banking sector because a healthy tax-to-GDP ratio allows the government to meet its expenses without 'pre-empting' or taking away too much capital from the banking system through high SLR requirements.

The Chelliah Committee recommended three major shifts that define our modern tax structure. First, it pushed for moderate tax rates for both individuals and corporates to encourage voluntary compliance. Second, it advocated for a simplified tax administration, reducing the number of exemptions which often led to litigation. This spirit of simplification eventually led to modern efforts like the Direct Tax Code (DTC), which seeks to replace old acts with a unified, flat-rate structure, and the General Anti-Avoidance Rule (GAAR) to prevent tax evasion Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.89. Third, it emphasized broadening the base, which eventually paved the way for taxing Services, a sector that was previously largely untaxed despite its growing share in the economy.

Why does this matter for your study of banking? A stable fiscal environment (high tax collection) reduces the Fiscal Deficit. When the deficit is low, the government doesn't need to borrow heavily from banks. This leaves more 'loanable funds' for the private sector, which is the ultimate goal of banking reforms. Conversely, a decrease in the Tax-to-GDP ratio is often a red flag, indicating slowing economic growth or a less equitable distribution of national income Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.128. By fixing taxes, the Chelliah Committee created the breathing room necessary for the banking sector to thrive.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Inclusive growth and issues, p.276; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.89; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.128

5. Industrial and Trade Policy Reforms (Abid Hussain Committee) (intermediate)

To understand the **Abid Hussain Committee**, we must first look at the 'License Raj' era. For decades, India followed a policy of Import Substitution—the idea that we should produce everything ourselves and restrict imports to protect local businesses. This was enforced through strict regulations like the FERA (Foreign Exchange Regulation Act), 1973 and heavy licensing requirements Indian Economy, Nitin Singhania, Indian Industry, p.379. However, this protectionism led to a lack of competition and technological stagnation. The Abid Hussain Committee (1984) was a turning point, as it suggested shifting the focus from simply 'saving' foreign exchange to 'earning' it through Export Promotion.

One of the most significant contributions of the Abid Hussain Committee (specifically in its later 1997 report) was regarding Small Scale Industries (SSIs). Historically, the government 'reserved' hundreds of products—from pencils to bread—that only small-scale units were allowed to manufacture. While intended to protect small players, it actually prevented them from achieving economies of scale or upgrading their technology. The committee recommended the dereservation of these items, arguing that small industries should be supported through credit and technology rather than just protection from competition.

As the industrial landscape shifted from protection to competition, the need for specialized financial support grew. This led to the empowerment of institutions like the Small Industries Development Bank of India (SIDBI), established in 1990. SIDBI moved beyond just providing loans; it adopted a 'Credit+' approach, helping MSMEs with skill upgradation, marketing, and technology modernization to help them survive in a globalized trade environment Indian Economy, Nitin Singhania, Money and Banking, p.182.

Feature	Old Strategy (Pre-Reform)	Abid Hussain Philosophy
Trade Goal	Import Substitution (Self-reliance via restriction)	Export Promotion (Global competitiveness)
SSI Protection	Reservation of items (Market protection)	Dereservation + Credit Support (Efficiency)

Sources: Indian Economy, Nitin Singhania, Indian Industry, p.379; Indian Economy, Nitin Singhania, Money and Banking, p.182; Indian Economy, Nitin Singhania, India’s Foreign Exchange and Foreign Trade, p.505

6. The Narasimham Committee on Financial Sector Reforms (exam-level)

To understand modern Indian banking, one must understand the Narasimham Committees. Before the 1991 crisis, the Indian banking sector was heavily controlled by the state; it was used primarily as a tool for social engineering and a cheap source of funding for the government. This led to high Non-Performing Assets (NPAs) and low efficiency. In the wake of the 1991 Balance of Payments crisis, the government appointed M. Narasimham (a former RBI Governor) to head the Committee on Financial System (Narasimham Committee-I). Its goal was simple but revolutionary: shift banking from administrative control to a market-driven, competitive framework Indian Economy, Vivek Singh (7th ed.), Money and Banking - Part II, p.127.

One of the most critical shifts proposed by the 1991 committee was the treatment of the Statutory Liquidity Ratio (SLR). Traditionally, the government used high SLR requirements to force banks to buy government bonds, essentially using bank deposits to fund the fiscal deficit. Narasimham-I recommended that SLR should be based on prudential requirements—meaning it should be a safety buffer for the bank's own health—rather than a tool for financing the government budget. The committee also laid the groundwork for modern Asset Classification and Income Recognition norms, ensuring banks couldn't hide bad loans on their balance sheets Indian Economy, Vivek Singh (7th ed.), Money and Banking - Part II, p.127.

The second committee (1998) looked ahead at a globalized economy. It emphasized greater autonomy for Public Sector Banks (PSBs) so they could function with the same professionalism as international banks. A major pain point identified was the legal delay in recovering bad loans. Both committees suggested that banks should have the power to take possession of securities and sell them to recover defaults without waiting years for court intervention—a recommendation that eventually led to the enactment of the SARFAESI Act Indian Economy, Vivek Singh (7th ed.), Money and Banking - Part II, p.136.

Feature	Pre-Reform Era	Narasimham Recommendations
SLR Purpose	Financing Government deficit	Prudential safety for banks
Loan Recovery	Slow court processes	Direct seizure of assets (SARFAESI concept)
Bank Management	Tight Government control	Operational autonomy and professionalism

Sources: Indian Economy, Vivek Singh (7th ed.), Money and Banking - Part II, p.127; Indian Economy, Vivek Singh (7th ed.), Money and Banking - Part II, p.136

7. Solving the Original PYQ (exam-level)

Now that you have mastered the architecture of the Indian banking system and the paradigm shift of the 1991 LPG reforms, this question asks you to identify the specific architect behind those structural changes. In the UPSC journey, you must connect the "what" (the policy) with the "who" (the committee). The building blocks you just studied regarding SLR (Statutory Liquidity Ratio), CRR (Cash Reserve Ratio), and Capital Adequacy were directly shaped by a roadmap designed to move India from administrative credit control to a market-driven economy.

To arrive at the correct answer, think about the most influential figure in Indian banking history. The (D) Narasimham Committee (both the 1991 and 1998 reports) is synonymous with Financial Sector Reforms. The logic is simple: following the 1991 Balance of Payments crisis, the government needed to ensure the banking system was robust enough to support a globalized economy. As noted in Indian Economy, Vivek Singh (7th ed. 2023-24), this committee specifically recommended reducing the government's "pre-emption" of bank funds through high SLR/CRR, allowing banks to become more competitive and efficient.

UPSC often uses "sector-association" traps to test your precision. For instance, the Abid Hussain Committee was focused on Small Scale Industries (SSI) and trade policy, while the Bhagwati Committee dealt with unemployment and public welfare. A very common trap is the Chelliah Committee; while it was also a pillar of the 1991 reform era, its primary domain was Tax Reforms, not the financial or banking sector. By applying the process of elimination and recognizing that "Financial Sector" is the broader umbrella for banking and capital market health, you can confidently identify the Narasimham Committee as the correct choice.