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The Recommendations of Narasimham Committee

Emerging Problems post Nationalization


1969- Banks Nationalization Effects1. Phenomenal increase in the geographical coverage of our banking and financial institutions. 2. Despite impressive quantitative achievement- low efficiency and productivity, bad portfolios performance, and eroded profitability. 3. Several public sector banks and financial institutions were incurring losses year after year.

Narasimham Committee

1991 -RBI proposed the committee chaired by M. Narasimham, former RBI Governor to review the Financial System. Review- aspects relating to the Structure, Organization, Procedures and Functioning of the financial system. Until recently, the lack of competitiveness vis--vis global standards, low technological level in operations, over staffing, high NPAs and low levels of motivation had shackled the performance of the banking industry.

Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector. The Narasimham Committee laid the foundation for the reformation of the Indian banking sector.

Problem Areas

Higher rates of CRR(15%) and SLR(38.5%) Directed credit programmes Political and Administrative interference Subsidizing of credit Mounting expenditures of banks

The main recommendations of the Committee were:

Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years Progressive reduction in Cash Reserve Ratio (CRR) to 3-5% Phasing out of directed credit programmes and redefinition of the priority sector

The main recommendations of the Committee were:

Stipulation of minimum capital adequacy ratio (CAR) of 8 per cent by March 1996. (Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures.)

Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts

Setting up of special tribunals to speed up the recovery process of loans Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount Abolition of branch licensing Liberalizing the policy with regard to allowing foreign banks to open offices in India

Liberalizing the policy with regard to allowing foreign banks to open offices in India Giving freedom to individual banks to recruit officers Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks Speedy liberalization of capital market Enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down prudential norms for such institutions, etc.

Committee On Banking Sector Reforms 1998


1998- Finance minister appointed Mr. Narasimham as chairman of one more committee. This committee was asked to review the progress of banking sector reforms to date and a programme on financial sector reforms to strengthen India's financial system and make it internationally competitive. The committee submitted its report to the government in April 1998. The report covered issues like- capital adequacy, bank mergers, recasting bank board, and creation of global sized banks.

Major Recommendations of Narasimham Committee 1998


Need for stronger banking system Experiment with concept of narrow banking Small local banks Capital Adequacy Ratio Review and update banking laws.

Need for stronger banking system

The committee has made clear the need of a stronger banking system , which would involve large inflows and outflows of large capital and consequent complications for exchange rate management and domestic liquidity. So committee recommended the merger of strong banks which would have a multiplier effect on industry. But has rejected the merger of weak banks with strong banks as it may have a negative impact on the asset quality of the stronger bank. The committee has also supported that two or three large Indian banks be given international or global character.

Small Local Banks

The committee has suggested setting up of small, local banks which would be confined to states or clusters of districts in order to serve local trade, small industry, and agriculture. At the same time, these banks should have strong corresponding relationship with the larger and international bank.

Experiment with concept of narrow banking

Serious concern for rehabilitation of weak PSBs which have accumulated a high percentage of NPAs in some cases as high as 20% of the total assets. Committee suggested the concept of narrow banking to rehabilitate weak banks. Narrow banking means that the weak banks place their funds only in the short term in risk-free assets- these banks try to match their demand deposits with safe liquid assets

Capital Adequacy Ratio

The committee has also suggested that the government should consider raising the prescribed capital adequacy ratio to improve inherent strength of banks and to improve their risk absorption capacity.

Review and update banking laws.

Committee has suggested an urgent need to review and amend the provisions of RBI Act, Banks Nationalization Act, etc so as to bring them in line with the current needs of the banking industry.

Other recommendations

Other recommendations relate to the need for automation of PSBs; professionalizing and depoliticizing bank boards; review of recruitment procedures; training and remuneration policies; real autonomy etc

EFFECTS

Emergence of 9 new private sector banks Opening up of capital vibrant market Great impact on banks balance sheet both on assets and liabilities

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