<P> First, the committee recommended that the RBI withdraw from the 91 - day treasury bills market and that interbank call money and term money markets be restricted to banks and primary dealers . Second, the Committee proposed a segregation of the roles of RBI as a regulator of banks and owner of bank . It observed that "The Reserve Bank as a regulator of the monetary system should not be the owner of a bank in view of a possible conflict of interest". As such, it highlighted that RBI's role of effective supervision was not adequate and wanted it to divest its holdings in banks and financial institutions . </P> <P> Pursuant to the recommendations, the RBI introduced a Liquidity Adjustment Facility (LAF) operated through repo and reverse repos to set a corridor for money market interest rates . To begin with, in April 1999, an Interim Liquidity Adjustment Facility (ILAF) was introduced pending further upgradation in technology and legal / procedural changes to facilitate electronic transfer . As for the second recommendation, the RBI decided to transfer its respective shareholdings of public banks like State Bank of India (SBI), National Housing Bank (NHB) and National Bank for Agriculture and Rural Development (NABARD) to GOI . Subsequently, in 2007--08, GOI decided to acquire entire stake of RBI in SBI, NHB and NABARD . Of these, the terms of sale for SBI were finalised in 2007--08 itself . </P> <P> The Committee recommended for merger of large Indian banks to make them strong enough for supporting international trade . It recommended a three tier banking structure in India through establishment of three large banks with international presence, eight to ten national banks and a large number of regional and local banks . This proposal had been severely criticized by the RBI employees union . The Committee recommended the use of mergers to build the size and strength of operations for each bank . However, it cautioned that large banks should merge only with banks of equivalent size and not with weaker banks, which should be closed down if unable to revitalise themselves . Given the large percentage of non-performing assets for weaker banks, some as high as 20% of their total assets, the concept of "narrow banking" was proposed to assist in their rehabilitation . </P> <P> There were a string of mergers in banks of India during the late 90s and early 2000s, encouraged strongly by the Government of India GOI in line with the Committee's recommendations . However, the recommended degree of consolidation is still awaiting sufficient government impetus . </P>

First phase of banking sector reforms in india