2. Introduction:
• The Government of India appointed a committee under the
Chairmanship of Mr. M. Narasimham.
• This is known as the Committee on Financial Sector Reforms in 1991.
• The second committee was asked to look in to the progress of
reforms till 1998 and to lay a course for further reforms.
• This committee is known as Committee on Banking Sector Reforms.
3. 1. First Phase of Reforms 1991 to 1998:
1. Four-Tier Hierarchy in Banking:
The committee recommended a four-tier hierarchy in the banking
sector:
• 3 to 4 large banks (at the top of hierarchy) with international status.
• 8 to 10 banks (at the second tier) with wide network of branches throughout
the country to perform general banking functions.
• Local banks whose operations to be confined to a particular region.
• Rural banks (at the bottom of hierarchy) to finance agriculture and allied
activities.
4. 2. Reduction in Statutory Liquidity Ratio (SLR):
The committee suggested for reduction in SLR from 38.5% to 25% over
a period of about years.
5. 3. Reduction in Cash Reserve Ratio (CRR):
The CRR to be reduced from 15% to 10% over a period of about 5
years.
6. 4. Deregulation of Interest Rates:
• The deregulation in interest rates would bring flexibility in interest
rates and transparency in banking transactions.
• Improve efficiency of the banking sector.
7. 5. Capital Adequacy Ratio (CAR):
• The committee suggested for increasing the CAR from 2% to 8% in a
phased manner over a period of time.
8. 6. Classification of Assets:
• The committee recommended for proper classification of assets and
full disclosure and transparency of accounts of banks and FIs.
9. 7. Capital Markets:
The committee recommended for reforms in the capital market sector.
• Issuer of capital (company) to fix its own price for the issue of securities
without government permission.
• Foreign financial investors to invest in Indian capital market.
• SEBI to frame effective guidelines to protect the interest of investors.
10. 8. Asset Reconstruction Fund (ARF):
• The ARF would take over a part of the doubtful debts/NPAs or the
banks and recover dues from defaulters.
11. 9. Redefining Priority Sector:
• The committee favoured a new priority sector which would include
only small and marginal farmers, cottage and tiny sector. The new
priority sector should get 10% of the funds/advances of the total
advances from the banking sector.
12. 10. Quasi-Autonomous Body:
• A quasi-autonomous body to supervise over the functioning of banks
and Financial Institutions under the sponsorship of the Reserve Bank.
13. 11. Other Recommendations:
• IDBI to play only refinancing role.
• Abolition of branch licensing policy.
• No further nationalization of banks.
• The dual control on the financial system (of RBI and Banking Division
of Ministry of Finance) to end.
15. • Mergers: Strong banks should be merged, while weaker banks should
be closed down.
• Capital Adequacy Ratio: The CAR to be increased from 8% to 10%.
• Three-Tier Banking Hierarchy: Narsimham recommended three-tier
hierarchy in the banking system
• 2 to 3 banks with international status.
• 8 to 10 banks with national status.
• A number of local banks.
16. • Credit Recovery Mechanism: Legal framework for credit recovery to
be strengthened.
• NPAs: Net non-performing assets for all banks to be brought down to
below 5% by the year 2000 and to 3% by 2002.
• Technology: Technological upgradation of banks to improve
productivity and to offer better customer service.
17. • Autonomy to Banks: Greater operational flexibility and autonomy to
banks. No interference of politicians in the appointment of the banks'
Board of Directors, which would bring professionalism in bank
management.
• Licensing Policy: The policy of licensing new private banks may be
continued.
• Foreign Banks: Foreign banks may be allowed to set up subsidiaries or
joint ventures in India.
• Integrated System Of Regulation: There has to be an integrated
system of regulation and supervision of the activities of banks, Fls,
and other players in the financial sector.
