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Narasimham Committee Reports

The Narasimham Committee Reports were two committees headed by M. Narasimham that made recommendations to reform India's banking system. The first report in 1991 recommended reducing reserve requirements, phasing out directed lending, and interest rate deregulation. The second report in 1998 reviewed banking reforms and recommended increasing capital adequacy ratios, granting banks more autonomy, and dealing with non-performing assets.

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Narasimham Committee Reports

The Narasimham Committee Reports were two committees headed by M. Narasimham that made recommendations to reform India's banking system. The first report in 1991 recommended reducing reserve requirements, phasing out directed lending, and interest rate deregulation. The second report in 1998 reviewed banking reforms and recommended increasing capital adequacy ratios, granting banks more autonomy, and dealing with non-performing assets.

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Bindal Heena
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Narasimham Committee Reports

Introduction
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 Reforms .

Narasimham
Committee Report I
(1991)

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

Problems Faced in India


Higher rates of CRR(15%) and SLR(38.5%)
Directed credit programs

Political and Administrative interference


Mounting expenditures of banks

Key Suggestions

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

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.

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

Directed Credit Programs:


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.

Interest Rate Deregulation:


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.

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.

Continued..
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.

Control of Banks:
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.

Establishment of ARF tribunal:


Those days, the proportion of bad debts and nonperforming 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 committee also suggested the formation of
special tribunals to recover loans granted by the
bank.

Classification of Assets:
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.

Raising Capital through Markets:


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.

Liberalisation of Capital Markets:


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.

Narasimham
Committee Report II
(1998)

Banking Sector Reforms Committee


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.

Recommendations:
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 character.

Narrow Banking:
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.

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.

Autonomy to Banks:
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.
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.

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.

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.

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.

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
implementation.

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.
Impact of the two committees has been so significant
that the financial-economic sector professionals have
been applauding their positive contribution.

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