Narrow banking
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Narrow banking is a model in which a bank puts its deposits only into very safe and liquid assets (assets that can be sold quickly for cash), such as government securities. The bank makes few or no risky loans, so it carries very little credit risk, the risk that borrowers will not repay. Depositors are safer, but the bank does less to channel credit into the economy.
Example
The Narasimham Committee II (1998) suggested narrow banking for weak banks, so they would stop adding bad loans while they recovered. Payments banks work in a similar way. They cannot lend and must keep at least 75% of their demand deposits in SLR government securities.
Don't confuse with
- Universal banking: the opposite idea. One institution does commercial banking, investment banking, insurance and more, and so takes on many kinds of risk.
Related concepts
- Scheduled bank
- Public sector bank
- Urban cooperative bank
- Universal banking
- Financial repression
- Islamic banking