The Narasimham Committee was formed in 1991 and 1998 to examine aspects of financial system reforms in India. The 1991 committee recommended reducing CRR and SLR, phasing out directed credit, interest rate deregulation, and restructuring banks. The 1998 committee focused on strengthening banks through mergers and raising capital adequacy ratios. Both committees significantly impacted Indian banking sector reforms.
an analysis about the Indian banking system and the analysis of two major banking sector reforms; Narasimham committee (1 and 2) on banking sector reforms
an analysis about the Indian banking system and the analysis of two major banking sector reforms; Narasimham committee (1 and 2) on banking sector reforms
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2. • Headed by Mr. M. Narasimham, who was
the 13th Governor of RBI
• First Committee, known as Narasimham
Committee I, was appointed in August
1991, against the backdrop of the Balance
of Payment Crisis
• 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
3.
4. • Narasimham Committee I was a nine-member
committee set up by the Government of India on
14 August 1991
• 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
5. • Reduction in CRR and SLR
• Phasing out Directed Credit Programmes
• Interest Rate Deregulation
• Structural Reorganization of Banks
• Change in the Control Structure of Banks
• Establishment of ARF tribunal
• Change in Classification of Assets
• Allowing Banks to raise Capital
• Liberalization of Capital Markets
6. • 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
• 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
7. • The committee acknowledged the role of these programs
in extending the reach of Banking system to the neglected
sectors of the economy
• However, it also called for re-examination of the present
relevance of these programs, especially for those sectors
which had become self-sufficient
• Accordingly, the committee proposed that the directed
credit committees should be phased out
• It also called for a re-defining of the priority sector
8. • The Committee observed that the prevailing structure of
administered rates was highly complex and rigid and
called for deregulating it so that it reflects the emerging
market conditions
• However, it warned against instant deregulation and
suggested that the rates be brought in line with the
market rates gradually over a period of time
• The Committee also recommended phasing out
Concessional Interest rates
9. 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
10. • The move towards this revised system should be market
driven and based on profitability considerations and
brought about through a process of mergers and
acquisitions
• The Committee also called on the Government to stop
further nationalization of Banks
• It also proposed that there be no bar to start new banks in
the private sector being set up provided they conform to
the start-up capital and other requirements
• It also called for liberalizing the process of foreign banks
entering the country
11. • The committee recommended that RBI should be the
sole authority in-charge of controlling the Banks
• It also called for greater autonomy to be given to Public
sector banks.
• The Committee believed that the internal organization
should be the prerogative of the management of the
Individual Banks
• For the medium and large national banks the Committee
proposed a three-tier structure in terms of head office, a
Zonal office and branches
• For very large banks, a four tier-structure was
proposed, with the addition of a regional office along with
the three mentioned above
12. • 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
13. • The Committee recommended that the assets of bank
should be classified into 4 categories: (a) standard (b)
sub-standard (c) doubtful, and (d) loss assets
• It also called for full and transparent disclosures to be
made in the Balance Sheet as recommended by the
International Accounting Standards Committee
14. • The Committee recommended that profitable banks and
banks with good reputation should be permitted to raise
capital from the public through the capital market
• Regarding other banks, the government should subscribe
to their capital or give a loan, which should be treated as
a subordinate debt, to meet their capital requirements
15. • The Committee suggested that there should be no need
to obtain any prior permission to issue capital
• It also called for the office of the “Controller of capital
issues” to be abolished
• The Committee also recommended that the Capital
markets should be opened for Foreign Portfolio
Investments
16.
17. • Setup by the Finance Ministry of the Government of India
under the chairmanship of Mr M. Narasimham in 1998.
• Committee submitted the report in April 1998
• Aim was to review the progress of the implementation of
the banking reforms since 1992 with the aim of further
strengthening the financial institutions of India
• Report focused on issues like size of banks and capital
adequacy ratio
18. Need for a Stronger Banking System:
• The Narasimham Committee has made out a
strong case for a stronger banking system in the
country
• 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
19. • Many public sector banks were facing a problem of the
Non-performing assets (NPAs)
• Some of them had NPAs were as high as 20 percent of
their assets
• For successful rehabilitation of these banks, the
committee recommended 'Narrow Banking Concept'
• Weak banks will be allowed to place their funds only in
short term and risk free assets.
20. • 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
21. • Greater autonomy was proposed for the public sector
banks in order for them to function with equivalent
professionalism as their international counterparts
• Committee recommended GOI equity in nationalized banks
be reduced to 33% for increased autonomy
• RBI should relinquish its seats on the board of directors of
these banks
• Committee recommended a review of functions of banks
boards with a view to make them responsible for
enhancing shareholder value through formulation of
corporate strategy and reduction of government equity
22. • 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
23. • 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
24. Implementation:
• To implement these recommendations, the RBI in Oct
1998, initiated the second phase of financial sector
reforms on the lines of Narasimham Committee-II report
• 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
25. • The mid-term Review of the Monetary and Credit Policy of
RBI announced another series of reforms, in line with the
recommendations with the Committee, in October 1999
• 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
• But some recommendations like reduction in Government's
equity to 33%, the issue of greater professionalism and
independence of the board of directors of public sector
banks is still awaiting Government follow-through and
26. • 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
• This was credited to the successful implementation of the
recommendations of the Narasimham Committee-II with
particular reference to the capital adequacy norms and the
recapitalization of the public sector banks
• Impact of the two committees has been so significant that the
financial-economic sector professionals have been applauding
there positive contribution
27. • “Banking” – by N. T. Somashekar
• www.rbi.org.in
• www.nabard.org/fileupload/DataBank/Newsletters/March
1992.pdf
• http://www.expressindia.com/fe/daily/19971230/3645526
3.html