NARASIMHAM COMMITTEE REPORT 1991 (COMMITTEE ON FINANCIAL SYSTEMS)

NARASIMHAM COMMITTEE REPORT - I INTRODUCTION The 1st Narasimham Committee was set up by Manmohan Singh as India’s Finance Minister on 14th August 1991 A nine member committee was set up under the chairmanship of M. Narasimham, a former Governor of Reserve Bank of India The Committee submitted its Report to the Finance Minister in November 1991 NARASIMHAM COMMITTEE REPORT - I

To Study : Structure Organisation Functions Procedures To Recommend: Improvements in Efficiency Productivity Profitability

RECOMMENDATION 1. Structural Reorganisation of the Banking Structure: Committee proposed a substantial reduction in the number of public sector banks through mergers and acquisitions 8 to 10 national banks 3 to 4 large banks Local Banks Rural Banks 2. Freedom to Foreign Banks to open Offices: The Government should allow foreign banks to open offices in India either as branches or as subsidiaries 3. Removal of the Duality of Control of Banks: The present system of dual control over the banking system between Reserve Bank and the Banking Division of the Ministry of Finance should end immediately

RECOMMENDATION 4. Setting up of Assets Reconstruction Fund: “Assets Reconstruction Fund” to take over from the nationalised banks and financial institutions, a portion of their bad and doubtful debts at a discount 5. Special Tribunals for Recovery of Loans: The committee recommended that special tribunals should be set up for recovering loans granted by banks 6. Directed Credit Programmes: Gradually phase out the directed credit programme Redefine the concept of priority sector – to include only the weakest section of the rural community.

RECOMMENDATION 7. Statutory Liquidity Ratio (SLR) & Cash Reserve Ratio (CRR): The SLR should be gradually reduced from the present 38.5 per cent to 25 percent over the next five years The CRR should be progressively reduced from the present high level of 15 per cent to 3 to 5 per cent. 8. De-regulation of Interest Rates: All the controls and regulations on interest rates on lending and deposit rates of banks and financial institutions should be removed 9. Capital Adequacy: By March 1996 the banks should achieve 8 per cent capital adequacy ratio as recommended by Basel Committee

RECOMMENDATION 10. Banks in the Private Sector: The Reserve Bank of India should permit the setting up of new banks in the private sector, provided they satisfy all the conditions and norms prescribed by the Reserve Bank 11. Free and Autonomous Banks: The public sector banks should be free and autonomous. 12. Proper Classification of Assets: The assetsof bank should be classified into 4 categories: (a) standard (b) sub-standard(c) doubtful, and (d) loss assets Full disclosures of assets and liabilities should be made in the balance-sheets of banks

NARASIMHAM COMMITTEE II – 1998 (COMMITTEE ON BANKING SECTOR REFORMS)

NARASIMHAM COMMITTEE REPORT - Ii INTRODUCTION The 2nd Narasimham Committee was set up by P.Chidambaram as Finance Minister of India in December 1997 It is also known as the Committee on Banking Sector Reforms The Committee submitted the report to the Finance Minister Yashwant Sinha in April 1998 NARASIMHAM COMMITTEE REPORT - Ii

Review Progress & Implementation of banking reforms Furthur Strengthening of financial institutions of India Focus on : Size of the Banks, Capital Adequacy Ratio

Strengthening Banks in India : The committee considered the stronger banking system in the context of the Current Account Convertibility ‘CAC’. It thought that Indian banks must be capable of handling problems regarding domestic liquidity and exchange rate management in the light of CAC. Thus, it recommended the merger of strong banks which will have ‘multiplier effect’ on the industry. Narrow Banking : Those days 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. Thus for successful rehabilitation of these banks, it recommended ‘Narrow Banking Concept’ where weak banks will be allowed to place their funds only in the short term and risk-free assets. Capital Adequacy Ratio : In order to improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribed capital adequacy norms. This will further improve their absorption capacity also. Currently, the capital adequacy ratio for Indian banks is at 9 percent. RECOMMENDATIONS

Bank ownership : As it had earlier mentioned the freedom for banks in its working and bank autonomy, it felt that the government control over the banks in the form of management and ownership and bank autonomy does not go hand in hand and thus it recommended a review of functions of boards and enabled them to adopt professional corporate strategy. Review of banking laws : The committee considered that there was an urgent need for reviewing and amending main laws governing Indian Banking Industry like RBI Act, Banking Regulation Act, State Bank of India Act, Bank Nationalisation Act, etc. This up gradation will bring them in line with the present needs of the banking sector in India. Need for more computerisation process in banks

IMPLEMENTATION OF RECOMMENDATIONS Successfully Implemented: The concept of a universal bank was discussed by the RBI and finally ICICI bank became the first universal bank of India 17 banks were considered eligible for autonomy CRR and SLR has been brought down gradually over the years There were a string of mergers in banks during late 90s and 2000s Still awaiting government approval : Issue of greater professionalism Issue of the board of directors of public sector banks Reduction in Government's equity to 33%