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The Recommendations of

Narasimham Committee

Presented by: Ankit Jain


Emerging Problems post
Nationalization
 1969- Banks Nationalization
 Effects-

1. Phenomenal increase in the geographical coverage of our


banking and financial institutions.
2. Despite impressive quantitative achievement- low
efficiency and productivity, bad portfolios performance,
and eroded profitability.
3. Several public sector banks and financial institutions were
incurring losses year after year.
Narasimham Committee

 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.

 Until recently, the lack of competitiveness vis-à-vis global


standards, low technological level in operations, over staffing, high
NPAs and low levels of motivation had shackled the performance
of the banking industry.
 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.

 The Narasimham Committee laid the foundation


for the reformation of the Indian banking sector.
Problem Areas
 Higher rates of CRR(15%) and SLR(38.5%)
 Directed credit programmes
 Political and Administrative interference
 Subsidizing of credit
 Mounting expenditures of banks
The main recommendations of the
Committee were: -
 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 programmes 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
 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.
Committee On Banking Sector
Reforms 1998
 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.
Major Recommendations of
Narasimham Committee 1998
 Need for stronger banking system
 Experiment with concept of narrow banking
 Small local banks
 Capital Adequacy Ratio
 Review and update banking laws.
Need for stronger banking system
 The committee has made clear the need of a stronger banking
system , which would involve large inflows and outflows of
large capital and consequent complications for exchange rate
management and domestic liquidity.
 So committee recommended the merger of strong banks which
would have a ‘multiplier effect’ on industry.
 But has rejected the merger of weak banks with strong banks
as it may have a negative impact on the asset quality of the
stronger bank.
 The committee has also supported that two or three large
Indian banks be given international or global character.
Small Local Banks
 The committee has suggested setting up of small,
local banks which would be confined to states or
clusters of districts in order to serve local trade, small
industry, and agriculture.

 At the same time, these banks should have strong


corresponding relationship with the larger and
international bank.
Experiment with concept of narrow
banking

 Serious concern for rehabilitation of weak PSBs which have


accumulated a high percentage of NPAs in some cases as high
as 20% of the total assets.

 Committee suggested the concept of narrow banking to


rehabilitate weak banks.

 Narrow banking means that the weak banks place their funds
only in the short term in risk-free assets- these banks try to
match their demand deposits with safe liquid assets
Capital Adequacy Ratio
 The committee has also suggested that the
government should consider raising the
prescribed capital adequacy ratio to improve
inherent strength of banks and to improve their
risk absorption capacity.
Review and update banking laws.

 Committee has suggested an urgent need to review


and amend the provisions of RBI Act, Banks
Nationalization Act, etc so as to bring them in line
with the current needs of the banking industry.
Other recommendations
 Other recommendations relate to the need for
automation of PSBs; professionalizing and
depoliticizing bank boards; review of recruitment
procedures; training and remuneration policies; real
autonomy etc
Thank You