In 1999, the Reserve Bank of India, in consultation with the Government of India, commissioned a report by a working group, to be chaired by M. S. Verma, former chair of State Bank of India, to examine the challenges faced by weak public sector banks (PSBs) and propose a comprehensive strategy for revival. Prior to the 1991 liberalization reforms, 26 of 27 PSBs were profitable. However, the reforms, including the adoption of new prudential norms on income recognition, asset classification, and provisioning, drastically affected the banking sector. By FY 1992/93, many PSBs reported significant losses, and by 1996, eight banks failed to meet the 8 percent capital-adequacy requirement, which is calculated by dividing a bank’s capital by its risk-weighted assets. The committee used seven key parameters, including the capital-adequacy ratio and return on assets, to identify the weakest banks, namely Indian Bank, UCO Bank, and United Bank of India. These banks exhibited high levels of nonperforming assets, low profitability, and ongoing reliance on government capital support. For example, Indian Bank’s gross nonperforming assets in 1999 stood at Rs. 3,709 crore, 37 percent of its gross advances.

The committee found that operational failures such as poor risk management, slow decision-making, and a limited product line, combined with human resource challenges such as overstaffing and low productivity, had worsened the financial health of these banks. Management inefficiencies, frequent leadership changes, and weak governance structures also played a key role in the banks’ decline. Despite government recapitalization of Rs. 6,740 crore during the 1990s, the banks failed to recover because of these persistent inefficiencies. The report highlighted that after liberalization, competition had intensified, with PSBs now competing with private sector and foreign banks, leaving weak PSBs struggling to adjust.

To address these issues, the Verma Committee recommended a comprehensive restructuring strategy that included operational, organizational, and financial reforms. It advocated transferring nonperforming assets to a specialized Asset Reconstruction Fund to relieve weak banks and focus on core business. Operational restructuring included implementing modern technology, improving risk management, and reducing costs through a 25 percent workforce reduction under a voluntary retirement scheme. Organizational reforms called for delayering administrative structures, rationalizing unviable branches, and appointing capable leadership with long tenures. Financial restructuring required conditional recapitalization, technology upgrades, and wage freezes for five years. The committee also proposed setting up a Financial Restructuring Authority to monitor the restructuring process and ensure successful implementation.

Dr. A. C. Shah, former chair of the Bank of Baroda, on the release of this report hailed it as one of the three important factors, along with the Narasimham Committee reports and the internationalization of banking, forcing the pace of a major revolution in banking. Unfortunately, recommendations such as workforce reduction were not implemented, and Asset Reconstruction Funds were not introduced until two decades later. Indian Bank and UCO Bank continue to operate as public sector banks with the government recapitalizing them; United Bank of India merged with Punjab National Bank in 2020.

The committee identified deep structural and operational inefficiencies, including poor risk management, overstaffing, and weak governance, as key factors behind the decline of weak public sector banks, and sought to address these issues through a comprehensive restructuring strategy aimed at restoring their financial health and competitiveness in a liberalized banking environment.