2. REFORM PHASE India faced a macro- economic crisis in 1991. The economy was growing at a very low rate. There was a general consensus that the banking system has not become sound enough as it should have been. Therefore, Govt. of India appointed a high level committee headed by Shri M. Narsimham, a former Governor of the RBI to address the problems and suggest the remedial measures. The recommendations of the committee became the basis of financial sector and banking sector.

3. Recommendations of the Committee on the Financial system ( 1991- Narsimham Committee-I) 1. Phased reduction of Statutory Pre- emptions or reduction in SLR and CRR :- The committee recommended that SLR should be reduced to 25% and CRR should be reduced to 10% over a period. 2. Interest rates on CRR balances :- The committee had recommended payment of interest on eligible balances (i.e cash balances above the basic minimum of 3%). 3. Phasing out of Directed Credit:- The committee recommended that priority sector should be redefined to comprise the small and marginal farmers, the tiny sector of industry, small business and transport and village and cottage Industries,rural artisans and other weaker sections. The target for this sector should be fixed at 10% of aggregate credit.

4. 4. Deregulate interest rate:- The committee felt that the existing interest structure on loans and deposits is complex and there should be some market orientation and link deregulation with reduction in fiscal deficit. 5. Capital Adequacy Ratio :- the committee had recommended that BIS norms on capital adequacy should be achieved over a period of 3 years by March 1996. minimum 4% by 1993 and 8% should be achieved by March 1996. 6. Adoption of Uniform Accounting Practices :- The banks and financial institutions should adopt uniform accounting practices.

5. 7. Transparency :- The balance sheets of banks and financial institutions should be made transpare4nt. Full disclosures should be made as per IASC. 8 Loan Recovery :- The committee suggested that Govt. Should take steps to ensure recovery of bank dues through creation of Recovery Tribunals. 9 Restructuring the Banks:- The committee recommended that the banks be restructured by creating 3-4 large banks which would become international character,8-10 national banks with network of branches throughout the country, local banks in specific regions and rural banks for rural areas. 10 Income Recognition :- The banks and financial institutions adopt uniform accounting practices in regard to income recognition and no income should be recognized in the accounts in respect of non- performing assets.

6. 11. Tackling Doubtful debts:- The committee recommended that Asset Reconstruction Fund (ARF) should be created to take over bad debts of the banks on discount, and bank balance sheet should be made clean as a one time exercise. The ARF should be provided with special powers for recovery. 12. Entry of Private banks :- The committee recommended that the Govt. should indicate that there would be no further nationalization of banks. This will remove the existing disincentive for the more dynamic among the private banks to grow. It also recommended that there would not be any difference in treatment between the public sector and private sector banks.

7. 13. Asset Classification :- The committee recommended that banks and financial institutions should categorize the assets into four categories – Standard Assets, Sub standard Assets, Doubtful Assets and Loss Assets and provisioning should be done in a phased manner. 14.Control of banking system:- The committee was of the view that the duality of the control over the banking system between the RBI and the banking division of the Ministry of Finance should end and that RBI should be primary agency for the regulation of banking system. 15. Supervision of Banks. 16. Foreign Banks.