Narsimha committee & financial sector reforms

1. Presented by:-
Ojas Maheshwari
Sonali Bansal
Apoorva Gupta
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2. How its all started…?
• By 1985, India started having balance of payments problems
& by the end of 1990, it was in a serious economic crisis.
• Government was close to default.
• Foreign exchange reserves reduced to such a point that India
could barely finance three weeks’ worth of imports which lead
the Indian government to airlift national gold reserves as a
pledge to the IMF in exchange for a loan to cover balance of
payment debts.
This event called into question the previous banking policies of
India. MBA D 2

3. How its all started…?
• In the light of these requirements, two times expert Committees were set up in
1990s under the chairmanship of M. Narasimham (an ex-RBI governor).
• The first Narasimhan Committee was appointed by Manmohan Singh as
India's Finance Minister on 14 August 1991 to study all aspects relating to the
structure, organization, functions and procedures of the financial systems and to
recommend improvements in their efficiency and productivity.
• And the second one was appointed by P.Chidambaram as Finance Minister in
December, with the aim of further strengthening the financial institutions of
India. It focused on issues like size of banks and capital adequacy ratio among
other things.
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4. Introduction
• India economic crisis to its status of third largest economy in the world by 2011,
India has grown significantly in terms of economic development
• Headed by Mr. M. Narasimham, who was the 13th Governor of RBI
• First Committee, known as Narasimham Committee I, was appointed in August
1991.
• Set up to analyze all factors related to financial system and give recommendation to
improve its efficiency and productivity
• The Second Committee, Known as Narasimham Committee II, was appointed in
1998
• It was given the task to review the implementation of the Banking Sector Reforms
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5. Problems Identified By The Narasimham
Committee :-
• 1. Directed Investment Programme
• 2. Directed Credit Programme
• 3. Interest Rate Structure
• 4. Additional Suggestions
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6. Narasimham Committee
Report I (1991)
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7. Narasimham Committee I was a nine-member committee set up by
the Government of India
It was set up to examine all aspects relating to the structure,
organisation, functions and procedures of the financial system
The Committee submitted its report to the Government on November
16, 1991
The report was tabled in the Parliament on December 17, 1991
About Committee..
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8. Recommendations
 1. Reduction in the SLR and CRR
 2. Phasing out Directed Credit Programme
 3. Interest Rate Determination
 4. Structural Reorganizations of the Banking sector
 5. Establishment of the ARF Tribunal
 6. Removal of Dual control
 7. Banking Autonomy
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9. Reduction in the SLR and CRR:
 One of the most important recommendations made by the committee was a drastic
reduction in CRR and SLR
 Committee noted that the high amount of CRR and SLR was hindering the productivity of
Banks considerably
 Both of these ratios were very high at that time. The SLR then was 38.5% and CRR was 15%.
 SLR and CRR meant locking the bank resources
 SLR was recommended to reduce from 38.5 % to 25% and CRR was recommended to be
reduced to 15% to a range of 3-5% by 1996-97
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10. Phasing out Directed Credit
Programme :-
• In India, since nationalization, directed credit programmes were adopted by the
government.
• This programme compelled banks to earmark then financial resources for the needy
and poor sectors at confessional rates of interest.
• It was reducing the profitability of banks and thus the committee recommended the
stopping of this programme.
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11. Interest Rate Determination:-
 Scheduled Commercial banks have now the freedom to set interest
rates on their deposits subject to minimum floor rates and maximum
ceiling rates.
 Interest rate on domestic term deposits has been decontrolled.
 The prime lending rate of SBI and other banks on general advances of
over Rs. 2 lakhs has been reduced.
 Rate of Interest on bank loans above Rs. 2 lakhs has been fully
decontrolled.
 The interest rates on deposits and advances of all Cooperative banks
have been deregulated subject to a minimum lending rate of 13%.
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12. Structural Reorganization of Banks:-
In regard to the structure of the Banking System, The Committee believed that
the structure should consist of:
• 3-4 Banks (Including SBI) becoming International Banks
• 8 to 10 national banks with a network of branches throughout the country
engaged in 'universal' banking
• Local banks whose operations would be generally confined to a specific region
• Rural banks (including RRBs) whose operations would be confined to the
rural areas and whose business would be predominantly engaged in financing
of agriculture and allied activities
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13. Establishment of ARF tribunal:-
• Those days, the proportion of bad debts and non-performing assets
of the public sector banks and Development financial institutes was
very high.
• The committee recommended the establishment of an Asset
Reconstruction Fund (ARF)
• The suggestion was that the ARF would take over the proportion of
the bad and doubtful debts from the banks and financial institutes.
• All bad and doubtful debts of the banks were to be transferred in a
phased manner to ensure smooth and effective functioning of the
ARF
• The committed also suggested the formation of special tribunals to
recover loans granted by the bank
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14. Removal of Dual Control
Those days banks were under the dual control of the
Reserve Bank of India (RBI) and the Banking Division of
the Ministry of Finance (Government of India). The
committee recommended the stepping of this system. It
considered and recommended that the RBI should be the
only main agency to regulate banking in India.
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15. Banking Autonomy
The committee recommended that the public
sector banks should be free and autonomous. In
order to pursue competitiveness and efficiency,
banks must enjoy autonomy so that they can
reform the work culture and banking technology
upgradation will thus be easy.
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16. Narasimham
Committee Report II
(1998)
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17. Recommendations
 Strengthening Banks in India
 Narrow Banking
 Capital Adequacy Ratio
 Bank ownership
 Review of banking laws
 NPA
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18. Strengthening Banks in India
• Recommended the merger of strong banks which will have a
“multiplier effect” on industry
• Recommended the use of mergers to build the size and strength
of operations for each bank
• Committee has also supported that two or three large strong
banks be given international or global character
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19. Narrow Banking
Those days many public sector banks were facing a problem
of the Nonperforming assets (NPAs). Some of them had
NPAs were as high as 20 percent of their assets. Thus for
successful rehabilitation of these banks it recommended
'Narrow Banking Concept‘ where weak banks will be
allowed to place their funds only in short term and risk free
assets.
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20. Capital Adequacy Ratio
• To improve the inherent strength of the Indian banking system the
committee recommended that the Government should raise the
prescribed capital adequacy norms
• This would improve their Risk absorption capacity
• The committee targeted raising the capital adequacy ratio to 9% by 2000
and 10% by 2002
• Recommended penal provisions for banks that fail to meet these
requirements
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21. Bank Ownership
• As it had earlier mentioned the freedom for banks in its
working and bank autonomy, it felt that the government
control over the banks in the form of management and
ownership and bank autonomy does not go hand in hand
and thus it recommended a review of functions of boards
and enabled them to adopt professional corporate
strategy.
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22. Review of banking laws
• Committee considered that there was an urgent need for
reviewing and amending main laws governing Indian Banking
Industry
• RBI Act, Banking Regulation Act, State Bank of India Act, Bank
Nationalization Act, etc.
• This upgradation will bring them in line with the present needs of
the banking sector in India
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23. Non-performing assets
• Narasimham Committee-II also highlighted the need for 'zero' non-performing assets for all Indian
banks with International presence
• Committee recommended creation of Asset Reconstruction Funds or Asset Reconstruction Companies
to take over the bad debts of banks, allowing them to start on a clean-slate
• Committee recommended a proper system to identify and classify NPAs and for an independent loan
review mechanism for improved management of loan portfolio
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24. • RBI raised Capital Adequacy Ratio by 1%
• Tightened the prudential norms for provisioning and asset classification in a
phased manner
• RBI targeted to bring the capital adequacy ratio to 9% by March 2001
• Criteria for “autonomous status” was identified by March 1999 and 17 banks
were considered eligible for autonomy
• Committee's recommendations let to introduction of a new legislation in 2002,
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
Implementation
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25. Impact
• Recommendations were far-fetched and far-ahead of their
times
• Recommendations were well received, leading to successful
implementation of most of its recommendations
• During the 2008 economic crisis, performance of Indian
banking sector was far better than their international
counterparts
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26. Financial Sector Reforms
Major aims of the financial sector reforms are to allocate the
resources proficiently, increasing the return on investment and
hastened growth of the real sectors in the economy.
The processes introduced by the Government of India under the
reform process are intended to upturn the operational efficiency
of each of the constituent of the financial sector.
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27. I. Growth of the banking sector in India
The government selected a high level committee on the financial
system (the narasimham committee) to look into all facets of the
financial system and make comprehensive recommendations for
improvements. The committee submitted its report in november
1991, making several recommendations for reforms in the banking
sector.
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28. II. Growth of the Capital Market in India
• Capital market is defined as a financial market that works as
a channel for demand and supply of debt and equity capital.
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CapitalMarket
Stock Market
Bond Market
Money Market

29. III. Growth in the Insurance sector in India
• There is a strong case for ending the public sector monopoly in
insurance and opening it up to private sector participants subject to
suitable prudential regulation.
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InsuranceAct
Insurance Act
(1938)
LIC Act (1956)
IRDA Act (1999)
Other Acts

30. Thank You !!
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