Narasimham Committee

Maidavolu Narasimham was one of the most prolific bankers in India post-independence. He served as the thirteenth governor of the RBI. His reports – the Narasimham Committee on Financial System (1991) and the Narasimham Committee on Banking Sector Reforms (1998) transformed the functionality of the Indian Banking sector in a commendable manner. He is also known for pioneering historical events such as bank mergers, asset reconstruction firms and the emergence of new-generation private banks.

This topic is an essential topic for UPSC aspirants. This topic discusses its history and recommendations in brief.

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Narasimham Committee 1991

History of the Committee

• The banks were not functioning properly during India’s economic liberalisation in 1991.
• India felt the need for an efficient banking system that is required for a nation’s economic development.
• That is why ex-Finance Minister of India Dr. Manmohan Singh established the Narasimham committee to examine the functioning of banks.
• On 14^th August 1991, the Government of India appointed a nine-member team called the Narasimham Committee I. Its chairman was Maidavolu Narasimham.
• From 2^nd May 1977 to 30^th November 1977, Narasimham remained the 13^th governor of RBI.
• The first report was introduced on 17th December 1991 in the parliament.

Recommendations of Narasimham Committee I

• Reduction in SLR and CLR

At that time, both Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) were extremely high. The SLR was 38.5%, and the CRR was 15%. To increase the bank’s productivity rates, the committee recommended reducing these high proportions. Accordingly, they suggested reducing SLR rates from 38.5% to 25% and CRR from 15% to 3-5%.

• Phasing out Directed Credit Programme

The Government of India implemented credit programmes that compelled banks to set aside funds for the needy and poor sectors at decreased rates. The committee suggested phasing out this program as it was not profitable for them.

• Interest Rate Determination

Narasimham committee insisted on determining interest rates based on market forces such as the supply and demand for funds. Earlier it was regulated by the Government of India. They suggested eliminating this process.

• Establishment of the ARF Tribunal

The proportion of Non-Performing assets and bad debts of the public sector banks and developmental institutions was very alarming then. The committee suggested the establishment of an Asset Reconstruction Fund (ARF) to take over the proportion of bad and doubtful debts from banks and financial institutions.

• Removal of Dual Control

Both RBI and the Banking Division under the Ministry of Finance regulated the banks at that time. The committee suggested removing this system and asked only RBI to regulate the banking sector.

• More Freedom to Banks

The committee suggested more freedom for banks. It suggested that every bank should be free and perform autonomously. Each bank should change its working technology to align with the evolving world. On the sole basis of professionalism and integrity, the Chief Executive and board of directors will be appointed.

• Reorganisation of the Banking Sector

The committee proposed to reduce the number of public sector banks through the process of acquisition and mergers. The broad pattern, according to the committee, should consist of:

1. Three or four large public sector banks like SBI should become international. The rest should remain local banks and operate in a specified region.
2. The committee recommended national recognition of 8 to 10 banks nationwide.
3. RBI will permit the establishment of new banks under the private sector if they conform to the minimum start-up capital. But, on the other hand, no new banks would be called national banks.
4. Foreign banks can operate in India as either subsidiaries or fully owned banks. Foreign banks can also set up joint ventures with Indian banks regarding investment banking.

Narasimham Committee-II (1998)

To intimate the second generation of financial sector reforms a committee on Banking Sector Reforms was formed in 1998 again under the chairmanship of M.Narasimham. The committee submitted its report on 23rd April 1998 by the finance minister of the Government of India. Many of them have been accepted and are under implementation. These mainly concentrate on strengthening the foundation of the banking system by structure, technological upgradation and human resource development.

Recommendations of Narasimham Committee II

Some of the recommendations of Narasimham Committee II are as follows:

• The Committee suggests that pending the emergence of markets in India where market risks can be covered, it would be desirable that capital adequacy requirements take into account market risks in addition to credit risks.
• There is an additional capital requirement of 5% of the foreign exchange open position limit. Such risks should be integrated into the calculation of risk-weighted assets. The Committee recommends that the foreign exchange open position limits should carry a 100% risk weight.
• Introduction of the norm of 90 days for income recognition in a phased manner.
• Banks have been advised to take effective steps for the reduction of NPAs and also put in place risk management systems and practices to prevent the re-emergence of fresh NPAs.
• Banks are permitted to issue bonds to augment their Tier II capital. Guarantee of the Govt. for these bonds is not considered necessary.
• The public sector banks have been permitted to recruit from the open market or by way of campus recruitment, skilled personnel in areas like information technology, risk management, treasury operations, etc.

This article mentions facts about the Narasimham committee, which is an essential topic for UPSC aspirants.

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