Narsimham Committee on Banking Reforms Decoded

From the 1991 India economic crisis to its status of third largest economy in the world by 2011, India has grown significantly in terms of economic development. So has its banking sector. During this period, recognising the evolving needs of the sector, the Finance Ministry of Government of India (GOI) set up various committees with the task of analysing India’s banking sector and recommending legislation and regulations to make it more effective, competitive and efficient.

NARSIMHAM COMMITTEE

Two such expert Committees were set up under the chairmanship of M. Narasimham. They submitted their recommendations in the 1990s in reports widely known as the Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998) Report. These recommendations not only helped unleash the potential of banking in India, they are also recognised as a factor towards minimising the impact of global financial crisis starting in 2007.

 Narsimham Committee Report 1 – 1991 

  • Set up in order to study the problem of the India Financial System and to suggest some reccomendation for the improvement.
  • The purpose of the Narasimham-I Committee was to study all aspects relating to the structure, organisation, functions and procedures of the financial systems and to recommend improvements in their efficiency and productivity.
  • The Committee submitted its report to the Finance Minister in November 1991 which was tabled in Parliament on 17 December 1991.

What it recommends?

  • Reduction of SLR and CRR: Both of these ratios were very high at that time. SLR was 38.5% and CRR was 15%.
  • Throwout the Direct Credit Program: Since nationalization in India, The Direct Credit Program were adopted. Under this the bank has to earmarks their financial resources that means bank has to put some money reserved for the needy and the poor sectors at concessional rate of interest. It was reducing bank’s profitability.
  • Eliminate Government controls on Interest rates and phasing out the concessional interest rates for the priority sector.
    • Recommends that the actual number of public sector banks need to be reduced.
    • SBI should developed as an International Bank.
    • 8 to 10 banks having nationwide presence, concentrate on national and universal banking services.
    • There would not be any nationalization and private or Foreign Banks should be allowed liberal entry in India.
  • Establishment of Asset Reconstruction Fund (ARF) Tribunal; It helps Banks to get rid of their bad debts.
  • RBI should be the only main agency to regulate banking in India.
  • Bank must enjoy Autonomy so that they can reform the work culture and banking technology upgradation would  thus be easy.

 Narsimham Committee Report 2 – 1998 

  • It is also known as Banking Sector Committee.
  • The Narasimham-II Committee was tasked with the progress review of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India.
  • It focussed on issues like size of banks and capital adequacy ratio among other things. M. Narasimham, Chairman, submitted the report of the Committee on Banking Sector Reforms (Committee-II) to the Finance Minister Yashwant Sinha in April 1998.

What it recommends?

  • Recommend the merger of strong Banks which would have multiplier effect on the industry.
  • Narrow Banking Concept: Where weak banks would be allowed to place their funds only in short term and risk free assets. (to get rid of NPA).
  • Increase CAR; This will further improve their absorption capacity also.
  • Review of Banking laws to upgrade them.
  • Faster Computerization and Technology Up-gradation.
  • Training of staff; To bring the professionalism in Banking Sector.
  • Reviewing Bank Recruitment.

 Implementations of Recommendations 

  • In 1998, RBI Governor Bimal Jalan informed the banks that the RBI had 3 to 4 years to implement the given recommendations.
  • Based on the other recommendations of the committee, the concept of a universal bank was discussed by the RBI and finally ICICI bank became the first universal bank of India.
  • The RBI published an “Actions Taken on the Recommendations” report on 31 October 2001 on its own website. Most of the recommendations of the Committee have been acted upon (as discussed above) although some major recommendations are still awaiting action from the Government of India.

 


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