Narasimham Committee 1991
Narasimham committee is a committee that was formulated by the Government of India in August 1991 for reviewing the financial system of the country. The government considers the inefficiency and low returns of the banking sector decided to remodel them for improving their performance. A committee of 9 members under the chairmanship of former RBI governor, M. Narasimham was constituted for analyzing different aspects of the Indian financial system. The committee submitted its report in November 1991 providing various comprehensive recommendations for bringing reforms in financial sectors.
recommendations of narasimham committee 1991
- Reduction in SLR and CRR: The committee recommended the reduction in Statutory reserve ratio and Cash reserve ratio that were very high at that time. High proportion of these ratio was reducing the productivity of banks as it leads to locking up of large resources of banks with government. Narasimham committee suggested of bringing down the SLR to 25% and CSR to 10%.
- Interest rate deregulation: It recommended deregulation of interest rate and providing banks an autonomy to decide interest rate themselves as per the market forces. Interest rates should be decided as per the demand and supply of funds in market.
- Removal of Dual control: Banking division of the ministry of Finance and RBI were the two authorities governing the banking institutions at that time. Committee recommended that RBI should only be the authority for regulating the activities of baking sector.
- 4-tier banking structure: Narasimham committee recommended construction of a 4-tier hierarchy for banking structure. At top, there should be 3-4 large banks including SBI, then 8-10 national banks, local banks and rural banks at bottom.
- Phasing out Directed credit programme: It suggested phasing out of Directed credit programme under which banks are required to deploy their funds under the government direction to poor sectors at lower rates. Banks should themselves decides the allocation of their funds freely.
- Setting up ARF Tribunal: Non-performing assets and bad debts were the alarming issues which were adversely affecting the performance of banks at that time. Committee suggested the establishment of ARF (Asset Reconstruction Fund) which will assist banks in recovering their debts.
- Banking autonomy: This committee recommended that Government should provide autonomy to banks for taking their decisions freely. Bank must take all decisions regarding upgradation of their technology and work culture themselves which will help them in raising their efficiency.
Narasimham committee 1998
In 1998, Government of Indian constituted yet another committee under the leadership of M. Narasimham. The committee was formulated with aim of further strengthening of financial institutions of the country. This committee is termed as “Banking sector reforms Committee”. It submitted its report in April 1998.
recommendations of narasimham committee (2) 1998
- Strengthening Banking sector: In context of Capital account convertibility (CAC), narasimham committee considered a strong banking system in country. Handling issues related to management of exchange rate and domestic liquidity must be in capability of Indian banks in light of CAC. Therefore, committee recommended merger of strong banks resulting in “multiplier effect” on industry.
- Narrow borrowing: NPAs (Non-performing assets) were very high at that time which were equal to 20% of bank assets. It was influencing the profitability of banking institutions. Committee recommended concept of narrow borrowing for easy rehabilitation of Indian banks. As per this, banks will be permitted to deploy their funds in risk free assets and for a short term.
- Bank ownership: Banks should be provided freedom regarding its working and management. Autonomy of banks and government interference in management of banks cannot go hand in hand. Therefore, committee recommended that functions of board should be reviewed and allowed to implement a professional corporate strategy.
- Capital adequacy norms: This committee suggested the reviewing of capital adequacy norms for strengthening of Indian financial system. The prescribed capital adequacy norms should be raised which will increase the absorption capacity of banks. Currently, 9% is the capital adequacy ratio which need to be increased.
- Transparency and credibility: Banks should maintain transparency in its reporting and avoid any manipulation which would otherwise lead to penalty. They are required to publish half yearly reports disclosing performance details, profitability, NPA and adequacy ratio. It will ensure better credibility and transparency regarding the soundness of institution in market.
- Amendment of Banking laws: Narasimham committee 2 suggested to review the present banking laws in light of current needs of banking industry. All main laws governing banking sector such as RBI act, Bank Nationalization Act, State bank of India act, Banking regulation act etc. need to be amended for bringing the required upgradation.