Therefore, the economic and banking policies were to be reversed to suit the requirements of a liberalized economy. The banking sector reform became inevitable to accelerate the pace of reforms to usher in a vibrant and competitive economy. An expert Committee under the Chairmanship of Shri M. Narasimham (a former Governor of RBI) was set up for spearheading the financial sector reform in India.
The Narasimham Committee (Committee on Financial Sector Reforms 1991) inter alia, recommended opening up of the banking sector to the private entrepreneurs to bring in competition and efficiency, thereby paving the way for licensing of new commercial banks in the private sector.