Narasimham Committee Reports

8/10/2019 Narasimham Committee Reports

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Narasimham Committee Reports


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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 itsefficiency and productivity.

The Second Committee, Known as NarasimhamCommittee II, was appointed in 1998.

It was given the task to review theimplementation of the Banking Sector Reforms .


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Narasimham

Committee Report I

(1991)


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Narasimham Committee I was a nine-membercommittee set up by the Government of India on

14 August 1991

It was set up to examine all aspects relating tothe structure, organisation, functions and

procedures of the financial system

The Committee submitted its report to theGovernment on November 16, 1991

The report was tabled in the Parliament onDecember 17, 1991


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Problems Faced in India

Higher rates of CRR(15%) and SLR(38.5%)

Directed credit programs

Political and Administrative interference

Mounting expenditures of banks


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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


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Reduction in the SLR and CRR:

One of the most important recommendationsmade by the committee was a drastic reduction inCRR and SLR.

Committee noted that the high amount of CRRand SLR was hindering the productivity of Banksconsiderably.

SLR was recommended to reduce from 38.5 % to25% and CRR was recommended to be reduced to15% to a range of 3-5% by 1996-97


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Directed Credit Programs:

The committee acknowledged the role of these

programs in extending the reach of Banking systemto the neglected sectors of the economy.

However, it also called for re-examination of thepresent relevance of these programs, especially forthose sectors which had become self-sufficient.

Accordingly, the committee proposed that thedirected credit committees should be phased out.

It also called for a re-defining of the priority sector.


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Interest Rate Deregulation:

The Committee observed that the prevailing

structure of administered rates was highlycomplex and rigid and called for deregulating it sothat it reflects the emerging market conditions.

However, it warned against instant deregulationand suggested that the rates be brought in linewith the market rates gradually over a period of

time.

The Committee also recommended phasing outConcessional Interest rates.


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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 branchesthroughout 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.


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Continued..The move towards this revised system should be

market driven and based on profitabilityconsiderations and brought about through a processof mergers and acquisitions.

The Committee also called on the Government tostop further nationalization of Banks.

It also proposed that there be no bar to start newbanks in the private sector being set up providedthey conform to the start-up capital and other

requirements.


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Establishment of ARF tribunal: Those days, the proportion of bad debts and non-

performing assets of the public sector banks andDevelopment financial institutes was very high.

The committee recommended the establishment ofan Asset Reconstruction Fund (ARF).

The suggestion was that the ARF would take overthe proportion of the bad and doubtful debts fromthe banks and financial institutes.

All bad and doubtful debts of the banks were to be

transferred in a phased manner to ensure smoothand effective functioning of the ARF.

The committee also suggested the formation ofspecial tribunals to recover loans granted by the

bank.


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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 asrecommended by the International Accounting

Standards Committee.


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Raising Capital through Markets:

The Committee recommended that profitablebanks and banks with good reputation should

be permitted to raise capital from the publicthrough the capital market.

Regarding other banks, the governmentshould subscribe to their capital or give a loan,which should be treated as a subordinatedebt, to meet their capital requirements.


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Liberalisation of Capital Markets:

The Committee suggested that there shouldbe no need to obtain any prior permission toissue capital.

It also called for the office of the Controllerofcapital issuesto be abolished.

The Committee also recommended that theCapital markets should be opened for ForeignPortfolio Investments.


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Narasimham

Committee Report II

(1998)


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Banking Sector Reforms Committee

Setup by the Finance Ministry of the Governmentof India under the chairmanship of Mr M.Narasimham in 1998.

Committee submitted the report in April 1998.

Aim was to review the progress of theimplementation of the banking reforms since 1992

with the aim of further strengthening the financialinstitutions of India.

Report focused on issues like size of banks and

capital adequacy ratio.


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Recommendations:Need for a Stronger Banking System:

The Narasimham Committee has made out a strong casefor a stronger banking system in the country.

Recommended the merger of strong banks which willhave a multiplier effecton 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 largestrong banks be given international or global character.


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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 20percent of their assets.

For successful rehabilitation of these banks, thecommittee recommended 'Narrow BankingConcept' .

Weak banks will be allowed to place their fundsonly in short term and risk free assets.


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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.


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Autonomy to Banks:

Greater autonomy was proposed for the public sector

banks in order for them to function with equivalentprofessionalism as their international counterparts.

Committee recommended GOI equity in nationalizedbanks be reduced to 33% for increased autonomy.

Committee recommended a review of functions of

banks boards with a view to make them responsiblefor enhancing shareholder value through formulationof corporate strategy and reduction of governmentequity.


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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.


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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.


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To implement these recommendations, the RBI inOct 1998, initiated the second phase of financialsector reforms on the lines of NarasimhamCommittee-II report.

RBI raised Capital Adequacy Ratio by 1% .

Tightened the prudential norms for provisioningand asset classification in a phased manner .

RBI targeted to bring the capital adequacy ratio to9% by March 2001.

Implementation:


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The mid-term Review of the Monetary and Credit Policy ofRBI announced another series of reforms, in line with therecommendations with the Committee, in October 1999.

Criteria for autonomous status was identified by March1999 and 17 banks were considered eligible for autonomy.

Committee's recommendations let to introduction of a new

legislation in 2002, Securitisation and Reconstruction ofFinancial Assets and Enforcement of Security Interest Act,2002.

But some recommendations like reduction in Government'sequity to 33%, the issue of greater professionalism andindependence of the board of directors of public sectorbanks is still awaiting Government follow-through andimplementation.


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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 significantthat the financial-economic sector professionals have

been applauding their positive contribution.


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