In 1991, reforms related to monetary policy, banking, and insurance were designed to address some key, overarching objectives: making India’s financial industry more robust and profitable and preparing it for global competition, facilitating market-based determination of interest rates, creating institutional autonomy, and maintaining financial stability in the face of external and internal shocks. The liberalization led to an increasingly overlapping range of services among various financial entities, including banks and developmental financial institutions (DFIs). This was a significant shift from the earlier scenario in which DFIs and refinancing institutions were primarily focused on meeting specific sectoral needs.

In 1997, to review these aspects of banking, Bimal Jalan, Governor of the Reserve Bank of India established a working group under S. H. Khan, Chairman and Managing Director of the Industrial Development Bank of India. Members included M. S. Verma (Chairman, State Bank of India); K. V. Kamath (Chief Executive Officer and Managing Director, Industrial Credit and Investment Corporation of India Ltd., Mumbai); K. D. Agrawal (Chairman and Managing Director, Industrial Finance Corporation of India Ltd., New Delhi); M. G. Bhide (Chairman and Managing Director, Bank of India, Mumbai); A. T. Pannir Selvam (Chairman and Managing Director, Union Bank of India, Mumbai); and V. Subrahmanyam (Executive Director, Reserve Bank of India, Mumbai). The group’s objectives were (i) to review the role, structure, and operations of DFIs and commercial banks; (ii) to provide ways of harmonizing lending and working-capital finance by banks and DFIs; (iii) to search for ways, within a regulatory framework, to provide DFIs greater access to short-term funds; and (iv) to recommend ways of improving organizational and management practices in DFIs and banks in the wake of capital account convertibility. The overall purpose was to help develop a progressive, universal banking system and a corresponding regulatory framework. In its interim report, it recommended that DFIs be allowed to have a banking subsidiary with shareholdings up to 100 percent.

In 1998, after the Khan Working Group submitted its final report, the Reserve Bank of India came out with a discussion paper on it and the recommendations of the Narasimham Committee–II that bore on the Khan Working Group’s report. In this paper were proposals for clarifying the roles and responsibilities of banks and financial institutions. The core idea was that DFIs be given the choice to transition into commercial banking or specialize in their current roles and be subsumed within the category of nonbanking financial corporations. Some of them, such as the Industrial Development Bank of India, the National Bank for Agriculture and Rural Development, and the National Housing Bank, also held supervisory authority over state financial corporations and regional rural banks. These roles needed to be brought under a common framework of the Board for Financial Supervision. The discussion paper also put forth the need for a Standing (Co-ordination) Committee with bank and DFI representatives to harmonize their operations and regulations, and it stated the need to follow best practices regarding human resources, risk management, and organizational design.

In addressing the evolving roles of development financial institutions and banks, the discussion paper proposed a framework for harmonizing their operations, clarifying responsibilities, and enabling DFIs to transition into commercial banking or specialize further. These recommendations aimed to build a cohesive, progressive financial system aligned with liberalization-era demands.