Sivaraman Committee

The Sivaraman Committee occupies an important place in the evolution of India’s banking and financial sector reforms, particularly during the period of transition from a tightly regulated financial system to a more market-oriented framework. Constituted at a time of growing stress in the banking system, the committee examined structural weaknesses in commercial banking and provided recommendations aimed at improving efficiency, stability, and accountability. Its work contributed to shaping the broader reform agenda of India’s financial sector in the early 1990s.

Background and Economic Context

By the late 1980s and early 1990s, the Indian economy was facing mounting fiscal deficits, low productivity, and inefficiencies within the financial system. The banking sector, dominated by public sector banks, was characterised by directed credit programmes, administered interest rates, weak profitability, and rising levels of non-performing assets.
In this context, the Government of India and the Reserve Bank of India recognised the need for a comprehensive review of the functioning of commercial banks. The Sivaraman Committee was constituted to study these issues and suggest corrective measures that could strengthen the banking system while supporting economic development.

Composition and Mandate

The committee was chaired by R. Sivaraman, a senior financial administrator with experience in banking regulation and public finance. Its mandate focused on evaluating the operational, financial, and structural aspects of commercial banks in India.
The key objectives of the committee included:

• Assessing the financial health and performance of commercial banks.
• Examining the impact of directed lending and interest rate controls.
• Reviewing capital adequacy and profitability concerns.
• Suggesting reforms to improve efficiency and risk management.

The committee’s work was intended to provide an analytical foundation for future banking sector reforms.

Key Observations on the Banking System

The Sivaraman Committee identified several structural weaknesses in the Indian banking system. One of its central observations was the erosion of financial discipline due to excessive government intervention in credit allocation and pricing.
The committee highlighted:

• High levels of non-performing assets arising from politically influenced lending.
• Inadequate capital buffers in public sector banks.
• Weak internal controls and insufficient risk assessment mechanisms.
• Limited managerial autonomy and accountability.

These issues were seen as major constraints on the ability of banks to support economic growth efficiently.

Recommendations on Banking Reforms

The Sivaraman Committee made a series of recommendations aimed at improving the financial soundness and operational efficiency of banks. While not all recommendations were implemented immediately, they influenced subsequent reform initiatives.
Major recommendations included:

• Strengthening capital adequacy norms to enhance bank resilience.
• Reducing excessive reliance on directed credit and priority sector obligations.
• Improving credit appraisal and recovery mechanisms.
• Enhancing managerial autonomy of banks while enforcing accountability.
• Gradual rationalisation of interest rate controls.

These recommendations reflected a shift towards prudential regulation and market-oriented banking practices.

Significance for Financial Sector Liberalisation

The Sivaraman Committee is often viewed as part of the intellectual groundwork that preceded the major financial sector reforms of the 1990s. Its emphasis on capital adequacy, asset quality, and profitability anticipated later reform measures that sought to align Indian banking with international standards.
By highlighting systemic weaknesses, the committee helped build consensus on the need for structural reform rather than incremental adjustments. Its findings reinforced the argument that a healthy banking system was essential for macroeconomic stability and sustainable growth.

Impact on Public Sector Banks

Public sector banks were the primary focus of the committee’s analysis, as they accounted for the majority of banking assets and credit in the Indian economy. The committee recognised their developmental role but stressed that social objectives should not undermine financial viability.
Its recommendations encouraged a rebalancing of objectives, advocating that public sector banks operate on sound commercial principles while continuing to support priority sectors. This approach influenced later reforms aimed at improving governance, performance evaluation, and accountability in public sector banking.

Relevance to the Indian Economy

From a macroeconomic perspective, the Sivaraman Committee contributed to redefining the role of the banking sector in India’s development strategy. A more efficient and stable banking system was seen as critical for mobilising savings, allocating capital productively, and supporting industrial and agricultural growth.
The committee’s work underscored the link between banking sector health and broader economic outcomes such as fiscal stability, investment growth, and financial inclusion. By addressing structural inefficiencies, its recommendations aimed to reduce systemic risk and enhance the economy’s capacity to absorb shocks.