With reference to the "Financial Sector Reforms", banks which fulfil certain conditions have been given freedom to: 1. Set up new branches only with the strict approval of the RBI. 2. Rationalise their existing branch networks. 3. Generate resources from India and abroad.

The correct option is 2 and 3 only Explanation The Financial Sector Reforms in India, initiated largely after 1991 based on the recommendations of the Narasimham Committee, aimed to transform the banking sector from a strictly regulated environment to one based on market forces and prudential norms. A key objective was to provide operational autonomy to banks that met specific financial health criteria. Statement-wise Analysis - Statement 1 is Incorrect. One of the significant measures of liberalization was the deregulation of branch licensing. Banks that fulfilled certain conditions (such as capital adequacy and non-performing asset norms) were given the freedom to set up new branches without the prior approval of the Reserve Bank of India (RBI). The statement incorrectly suggests that strict approval is still required for compliant banks. - Statement 2 is Correct. As part of the operational autonomy granted during the reforms, banks were allowed to rationalize their existing branch networks. This included the freedom to close unviable branches, swap locations, or merge branches to improve efficiency and profitability. - Statement 3 is Correct. To strengthen their capital base and reduce dependence on government funding, banks were granted the freedom to generate resources from the capital market. This included raising funds through equity in India and accessing foreign markets (subject to regulations), thereby increasing the participation of private and foreign investors. Key Takeaway: The Financial Sector Reforms shifted the RBI's role from a "regulator" to a "facilitator," granting compliant banks the autonomy to expand branch networks without prior licensing and to raise capital independently from domestic and international markets.

NCERT Class 11 Economics — Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal

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With reference to the "Financial Sector Reforms", banks which fulfil certain conditions have been given freedom to:

Set up new branches only with the strict approval of the RBI.
Rationalise their existing branch networks.
Generate resources from India and abroad.

Official previous-year question

Verified 1 Aug 2026.

Options

A1, 2 and 3
B1 and 2 only
C2 only
D2 and 3 only

Did you get this right?

Solution

The correct option is 2 and 3 only

Explanation

The Financial Sector Reforms in India, initiated largely after 1991 based on the recommendations of the Narasimham Committee, aimed to transform the banking sector from a strictly regulated environment to one based on market forces and prudential norms. A key objective was to provide operational autonomy to banks that met specific financial health criteria.

Statement-wise Analysis

Statement 1 is Incorrect. One of the significant measures of liberalization was the deregulation of branch licensing. Banks that fulfilled certain conditions (such as capital adequacy and non-performing asset norms) were given the freedom to set up new branches without the prior approval of the Reserve Bank of India (RBI). The statement incorrectly suggests that strict approval is still required for compliant banks.
Statement 2 is Correct. As part of the operational autonomy granted during the reforms, banks were allowed to rationalize their existing branch networks. This included the freedom to close unviable branches, swap locations, or merge branches to improve efficiency and profitability.
Statement 3 is Correct. To strengthen their capital base and reduce dependence on government funding, banks were granted the freedom to generate resources from the capital market. This included raising funds through equity in India and accessing foreign markets (subject to regulations), thereby increasing the participation of private and foreign investors.

Key Takeaway: The Financial Sector Reforms shifted the RBI's role from a "regulator" to a "facilitator," granting compliant banks the autonomy to expand branch networks without prior licensing and to raise capital independently from domestic and international markets.

Your note

More from Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal

With reference to the economic crisis of 1991 in India, consider the following statements: 1. The crisis was triggered because the government was unable to make repayments on its borrowings from abroad. 2. Foreign exchange reserves were sufficient for more than a year of imports. 3. The crisis was compounded by rising prices of essential goods. Which of the statements given above is/are correct?

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Consider the following statements regarding the deregulation of the industrial sector under the 1991 reforms: 1. Industrial licensing was abolished for all product categories without exception. 2. Industries reserved for the public sector were reduced to only a part of atomic energy generation and some core activities in railway transport. 3. The market was allowed to determine prices in most industries. Which of the statements given above is/are correct?

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With reference to the 'Outsourcing' phenomenon under globalisation, consider the following statements: 1. It involves a company hiring regular services from external sources which were previously provided internally. 2. The growth of outsourcing is primarily driven by the stagnation of the manufacturing sector in developed countries. 3. India has become a destination for outsourcing due to low wage rates and the availability of skilled manpower. Which of the statements given above is/are correct?

medium

With reference to the trade policy reforms initiated in 1991, consider the following statements: 1. Quantitative restrictions on imports of manufactured consumer goods were fully removed immediately in 1991. 2. Export duties were removed to increase the competitive position of Indian goods in international markets. 3. Import licensing was abolished except for hazardous and environmentally sensitive industries. Which of the statements given above is/are correct?

hard

Consider the following statements regarding the performance of the agriculture sector during the reform period: 1. Public investment in the agriculture sector has declined in the reform period. 2. The removal of fertiliser subsidy has decreased the cost of production for farmers. 3. There has been a shift from export market production to domestic market production. Which of the statements given above is/are correct?

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The correct option is 2 and 3 only

Explanation

Statement-wise Analysis

Statement 1 is Incorrect. One of the significant measures of liberalization was the deregulation of branch licensing. Banks that fulfilled certain conditions (such as capital adequacy and non-performing asset norms) were given the freedom to set up new branches without the prior approval of the Reserve Bank of India (RBI). The statement incorrectly suggests that strict approval is still required for compliant banks.
Statement 2 is Correct. As part of the operational autonomy granted during the reforms, banks were allowed to rationalize their existing branch networks. This included the freedom to close unviable branches, swap locations, or merge branches to improve efficiency and profitability.
Statement 3 is Correct. To strengthen their capital base and reduce dependence on government funding, banks were granted the freedom to generate resources from the capital market. This included raising funds through equity in India and accessing foreign markets (subject to regulations), thereby increasing the participation of private and foreign investors.