Narasimham Committee

Report
Report on
on Financial
Financial Reforms
Reforms

Group 15
Ajinkya Patil 11020241002
Gautam Siddharth
11020241017
Vivek Choksi - 11020241049

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
its efficiency and productivity
The Second Committee, Known as Narasimham
Committee II, was appointed in 1998
It was given the task to review the
implementation of the Banking Sector Reforms

Narasimham
Committee
Report I (1991)

 Narasimham Committee I was a ninemember committee set up by the

Government of India on 14 August 1991
It was set up to examine all aspects relating
to the structure, organisation, functions and
procedures of the financial system
The Committee submitted its report to the
Government on November 16, 1991
The report was tabled in the Parliament on
December 17, 1991

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

Reduction in the SLR and CRR:

One of the most important recommendations made
by the committee was a drastic reduction in CRR
and SLR
Committee noted that the high amount of CRR and
SLR was hindering the productivity of Banks
considerably
SLR was recommended to reduce from 38.5 % to
25% and CRR was recommended to be reduced to
15% to a range of 3-5% by 1996-97

Directed Credit Programs:

The committee acknowledged the role of these
programs in extending the reach of Banking
system to the neglected sectors of the economy
However, it also called for re-examination of the
present relevance of these programs, especially for
those sectors which had become self-sufficient
Accordingly, the committee proposed that the
directed credit committees should be phased out
It also called for a re-defining of the priority sector

Interest Rate Deregulation:

The Committee observed that the prevailing
structure of administered rates was highly
complex and rigid and called for deregulating it so
that it reflects the emerging market conditions
However, it warned against instant deregulation
and suggested that the rates be brought in line
with the market rates gradually over a period of
time
The Committee also recommended phasing out
Concessional Interest rates

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 branches
throughout 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

 The move towards this revised system should be

market driven and based on profitability
considerations and brought about through a process of
mergers and acquisitions
The Committee also called on the Government to stop
further nationalization of Banks
It also proposed that there be no bar to start new
banks in the private sector being set up provided they
conform to the start-up capital and other requirements
It also called for liberalizing the process of foreign
banks entering the country

Control of Banks:
The committee recommended that RBI should be the sole
authority in-charge of controlling the Banks
It also called for greater autonomy to be given to Public
sector banks.
The Committee believed that the internal organization
should be the prerogative of the management of the
Individual Banks
For the medium and large national banks the Committee
proposed a three-tier structure in terms of head office, a
Zonal office and branches
For very large banks, a four tier-structure was proposed,
with the addition of a regional office along with the three
mentioned above

Establishment of ARF
tribunal:
Those days, the proportion of bad debts and nonperforming assets of the public sector banks and
Development financial institutes was very high.
The committee recommended the establishment of an
Asset Reconstruction Fund (ARF)
The suggestion was that the ARF would take over the
proportion of the bad and doubtful debts from the
banks and financial institutes.
All bad and doubtful debts of the banks were to be
transferred in a phased manner to ensure smooth and
effective functioning of the ARF
The committed also suggested the formation of
special tribunals to recover loans granted by the bank

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 as recommended by
the International Accounting Standards Committee

Raising Capital through

Markets:
The Committee recommended that profitable
banks and banks with good reputation should be
permitted to raise capital from the public through
the capital market
Regarding other banks, the government should
subscribe to their capital or give a loan, which
should be treated as a subordinate debt, to meet
their capital requirements

Liberalisation of Capital
Markets:
The Committee suggested that there should be no
need to obtain any prior permission to issue
capital
It also called for the office of the Controller of
capital issues to be abolished
The Committee also recommended that the
Capital markets should be opened for Foreign
Portfolio Investments

Narasimham
Committee
Report II
(1998)

Banking Sector Reforms

Committee
Setup by the Finance Ministry of the Government of
India under the chairmanship of Mr M. Narasimham
in 1998.
Committee submitted the report in April 1998
Aim was to review the progress of the implementation
of the banking reforms since 1992 with the aim of
further strengthening the financial institutions of India
Report focused on issues like size of banks and capital
adequacy ratio

Recommendations:
Need for a Stronger Banking System:
The Narasimham Committee has made out a strong
case for a stronger banking system in the country
Recommended the merger of strong banks which will
have a multiplier effect on 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 large
strong banks be given international or global character

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 20
percent of their assets
For successful rehabilitation of these banks, the
committee recommended 'Narrow Banking
Concept'
Weak banks will be allowed to place their funds
only in short term and risk free assets.

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
Recommended penal provisions for banks that fail
to meet these requirements

Autonomy to Banks:
Greater autonomy was proposed for the public sector
banks in order for them to function with equivalent
professionalism as their international counterparts
Committee recommended GOI equity in nationalized
banks be reduced to 33% for increased autonomy
RBI should relinquish its seats on the board of directors
of these banks
Committee recommended a review of functions of banks
boards with a view to make them responsible for
enhancing shareholder value through formulation of
corporate strategy and reduction of government equity

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

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

Implementation:
To implement these recommendations, the RBI in
Oct 1998, initiated the second phase of financial
sector reforms on the lines of Narasimham
Committee-II report
RBI raised Capital Adequacy Ratio by 1%
Tightened the prudential norms for provisioning
and asset classification in a phased manner
RBI targeted to bring the capital adequacy ratio to
9% by March 2001

 The mid-term Review of the Monetary and Credit Policy of

RBI announced another series of reforms, in line with the
recommendations with the Committee, in October 1999
Criteria for autonomous status was identified by March
1999 and 17 banks were considered eligible for autonomy
Committee's recommendations let to introduction of a
new legislation in 2002, Securitisation and
Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002
But some recommendations like reduction in
Government's equity to 33%, the issue of greater
professionalism and independence of the board of
directors of public sector banks is still awaiting
Government follow-through and implementation

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
This was credited to the successful implementation of the
recommendations of the Narasimham Committee-II with
particular reference to the capital adequacy norms and the
recapitalization of the public sector banks
Impact of the two committees has been so significant that the
financial-economic sector professionals have been applauding
there positive contribution

Bibliography:
Banking by N. T. Somashekar
www.rbi.org.in
www.nabard.org/fileupload/DataBank/Newsletters
/March1992.pdf
http://www.expressindia.com/fe/daily/19971230/3
6455263.html

Thank You