narsimha committe bcom 2 nd

1. SUBMITTED TO: SUBMITTED BY:
MAM TANYA SHARMA

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

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. OTHER SUGGESSTIONS
 Adoption of uniform accounting practises
 Income recognition
 Provisioning
 Transparency
 Computerisation
 Development of financial institutions

7. • 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

8. • 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.

9. • 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

10. 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

11. • 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

12. • 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
BRANCH LICENSING
• Opening and closing of branches other than rural should be
left to judgement of 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

13. • 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

14. Adoption of
uniform
accounting
practises
Income
recognition
Provisioning
ADOPTION OF UNIFORM ACOUNTING
PRACTISES
Banks and financial institutions should adopt uniform accounting practises . This
particularly requires income recognition and provisioning against doubtful debts.

15. • 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. Provision of 10 per cent in
case of sub standard asset and 100 per cent of security shortfall
in case of doubtful debts. In case of secured debts in doubtful
category a further provision of 20 to 50 per cent should be
created.

16. INCOME RECOGNITION:
•In banks and financial institutions , which follow accrual
system of accounting should not recognise any income in
respect of non performing assets.
•Asset would be considered NPA , if interest on asset is due
for a period exceeding 180 days on balance sheet date .

17. • 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

18. • 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

19. Computerisation:
It favoured Rangrajan committee on computerisation .
Computers are indispensable tools of customer service.
Transparency:
Final accounts of banks should be made transparent . Full
disclosure be made as per International Accounting Standards
Committee norms. This may be done after implementing
income recognisation and provisioning norms.
Development financial institutions (DFI):
• Should be granted operational flexibility , measure of
competition.
• System of syndication or participation in lending should be
evolved.
• Cross equity holding amongst DFI should be done away with.
• Regulatory framework should be made for new institutions

21. INTREST RATE DEREGULATION:
Interest rate on deposits and loans almost completely
deregulated in April 1998. All advances from RBI are now
linked to bank rate. Lending rate is linked to Prime Lending
Rate.
REDUCTION OF CRR AND SLR:
CRR has been bought down to 10 per cent and SLR to 25 per
cent .
DIRECTED CREDIT:
Number of directed credit categories and interest rate subsidy
element has been reduced . Weaker section under priority
sector have been redefined.
BRANCH LISCENSING:
It has been liberalised . Domestic banks satisfy capital

22. • PRIVATE AND FOREIGN BANKS:
Setting up of new private sector banks and entry of foreign
banks have been allowed.
• BANK’S ACCESS TO CAPITAL MARKET:
Nationalised banks have been permitted to raise capital from
the public upto 49 % .
• SUPERVISION:
Board of Financial Supervision has been set up. BFS
supervises financial institutions , NBFC’s in addition to banks.
• CUSTOMER SERVICE:
Banking Ombudsman scheme 1995 was introduced for speedy
settlement of disputes.

23. MERGER OF BANKS:
New Bank of India was merged with Punjab National Bank in
1993. Some other Banks proposals are pending .
RECOVERY OF TRIBUNALS:
Special Debt Recovery Tribunal has been set up.
COMPUTERISATION:
An agreement for computerisation was signed with trade
unions. Banks computerisation is taking place at a fast pace.
PRUDENTIAL ACCOUNTING STANDARDS:
Prudential accounting norms regarding income recognition ,
asset classification and provisioning have been implemented
in a phased manner and is being further strengthened.

24. • 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

26. • 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

27. 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

28. • 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.

29. • 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

30. • 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

31. • 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

32. • 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

33. • 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
Implementation:

34. • 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

35. • “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
• Course book – Banking and Insurance B. Com 2 P.U.
Chd.