The Narasimham Committee, established in 1991, submitted two reports that laid the foundation for reforming the Indian banking sector. The committee recommended reducing statutory reserve requirements to improve bank efficiency and productivity. It also recommended phasing out directed lending programs, adopting uniform accounting practices, and increasing capital adequacy requirements. The 1998 Narasimham Committee report further recommended strengthening the banking system, experimenting with narrow banking, increasing capital adequacy ratios, and updating banking laws. The committees' recommendations helped spur the emergence of new private banks and opened up India's capital markets.

1. Narasimham Committee Presented by: ASHUTOSH A. ANAY V. KUSHANG T. ARCHANA T.

2. 1969- Banks Nationalization ‡ Effects Phenomenal increase in the geographical coverage of our banking and financial institutions. Despite impressive quantitative achievement- low efficiency and productivity, bad portfolios performance, and eroded profitability. Several public sector banks and financial institutions were incurring losses year after year. Why the Committee

3. 1991 -RBI proposed the committee chaired by M. Narasimham, former RBI Governor to review the Financial System ‡ Review- aspects relating to the Structure, Organization, Procedures and Functioning of the financial system Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector T he Narasimham Committee laid the foundation for the reformation of the Indian banking sector About the committee

4. Higher rates of CRR(15%) and SLR(38.5%) Directed credit programs Political and Administrative interference Subsidizing of credit Mounting expenditures of banks Problems faced then

5. Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years Progressive reduction in Cash Reserve Ratio (CRR) to 3-5% Phasing out of directed credit programme and redefinition of the priority sector Stipulation of minimum capital adequacy ratio of 8 per cent by March 1996. (Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures.) Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts The main recommendations of the Committee were: -

6. Setting up of special tribunals to speed up the recovery process of loans Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount Abolition of branch licensing Liberalizing the policy with regard to allowing foreign banks to open offices in India Giving freedom to individual banks to recruit officers Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks Speedy liberalization of capital market Enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down prudential norms for such institutions, etc. CONTD

7. 1998- Finance minister appointed Mr. Narasimham as chairman of one more committee. This committee was asked to “review the progress of banking sector reforms to date and a programme on financial sector reforms to strengthen India's financial system and make it internationally competitive”. The committee submitted its report to the government in April 1998. The report covered issues like- capital adequacy, bank mergers, recasting bank board, and creation of global sized banks. Committee On Banking Sector Reforms 1998

8. Need for stronger banking system Experiment with concept of narrow banking Small local banks Capital Adequacy Ratio Review and update banking laws. Major Recommendations of Narasimham Committee 1998

9. T he Effect Emergence of 9 new private sector banks Opening up of vibrant capital market Great impact on banks balance sheets both on assets and liabilities side

10. LIABILITY Deposit interest rate Increase in capital Adequacy requirement ASSET Reforms on Lending rate Lower CRR and SLR IRAC norms Other Reforms Structural Reforms Entry to new business lines

11. Some Fact ‡ Nationalization of banks in 1969: 14 banks were nationalized Branch expansion: Increased from 8260 in 1969 to 71177 in 2006 ‡ Population served per branch has come down from 64000 to 16000 ‡ A rural branch office serves 15 to 25 villages within a radius of 16 kms ‡ However, at present only 32,180 villages out of 5 lakh have been covered

12. Some Fact Contd…. ‡ Deposit mobilization 1951-1971 (20 years)- 700% or 7 times 1971-1991 (20 years)- 3260% or 32.6 times 1991- 2006 (11 years)- 1100% or 11 times Expansion of bank credit: Growing at 20-30% p.a. thanks to rapid growth in industrial and agricultural output Development oriented banking: priority sector lending

13. Some Fact Contd…. ‡ Diversification in banking: Banking has moved from deposit and lending to Merchant banking and underwriting Mutual funds Retail banking A T Ms Internet banking Venture capital funds Factoring