Government to revisit plan for 3-tier banking system

MUMBAI: The government is likely to revisit the nearly two-decade-old Narasimham Committee's recommendation for a three-tier banking system. The government is likely to take the consolidation approach while considering capitalising of banks.

Responding to a TOI question, Arjun Meghwal, minister of state for finance, said that these proposals were being reviewed as part of the Indradhanush programme.

In 1998, a committee headed by the former Reserve Bank of India governor M Narasimham was set up 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.

Interestingly , the committee had said 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.Meghwal said, “If a borrower wanted to raise Rs 10,000 crore, he would go to one of the large banks.“

The large banks are needed for big-ticket loans because banks are subject to exposure norms that prescribe maximum loan size in relation to the capital. The government had earlier said that it would inject capital only into well-managed banks. This has precipitated a near crisis for weak banks that have been placed under watch by the RBI un der its prompt corrective action (PCA) scheme.

The proposal to have fewer, larger public sector banks is one that has been supported by the RBI. “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,“ the RBI's governor Urjit Patel had said in a speech in New York in April. According to Patel, some of the banks could be merged as a quid pro quo for capital injection by the government.