Highlights of Narasimham Committee Recommendations

on Banking Reforms in India!

The main recommendations of Narasimham Committee (1991) on
the Financial (Banking) System are as follows;
(i) Statutory Liquidity Ratio (SLR) is brought down in a phased
manner to 25 percent (the minimum prescribed under the law) over
a period of about five years to give banks more funds to carry
business and to curtail easy and captive finance.
(ii) The RBI should reduce Cash Reserve Ratio (CRR) from its
present high level.
(iii) Directed Credit Programme i.e., credit allocation under
government direction, not by commercial judgement of banks under
a free market competitive system, should be phased out. The
priority sector should be scaled down from present high level of 40
percent of aggregate credit to 10 percent. Also the priority sector
should be redefined.
(iv) Interest rates to be deregulated to reflect emerging market
conditions.
(v) Banks whose operations have been profitable is given
permission to raise fresh capital from the public through the capital
market.
(vi) Balance sheets of banks and financial institutions are made
more transparent.
(vii) Set up special tribunals to help banks recover their debt
speedily.

(viii) Changes be introduced in the bank structure 3-4 large banks

with international character, 8- 10 national banks with branches
throughout the country, local banks confined to specific region of
the country, rural banks confined to rural areas.
(ix) Greater emphasis is laid on internal audit and internal
inspection in the banks.
(x) Government should indicate that there would be no further
nationalisation of banks, the new banks in the private sector should
be welcome subject to normal requirements of the RBI, branch
licensing should be abolished and policy towards foreign banks
should be more liberal.
(xi) Quality of control over the banking system by the RBI and the
Banking Division or the Ministry of Finance should be ended and
the RBI should be made primary agency for regulation of banking
system.
(xii) A new financial institution called the Assets Reconstruction
Fund (ARF). Should be established which would take over from
banks and financial institutions a portion of their bad and doubtful
debts at a discount (based on realisable value of assets), and
subsequently follow up on the recovery of the dues owed to them
from the primary borrowers.

Follow-up Action:
(i) Statutory Liquidity Ratio (SLR) on incremental Net Domestic
and Time Liabilities (NDTL) reduced from 38.5 percent in 1991-92
to 28 percent by December 1996.
(ii) Effective Cash Reserve Ratio (CRR) on the NDTL reduced from
14 percent to 10 percent in January 1997.

(iii) In April, 1992 the RBI introduced a risk assets ratio system for
banks (including foreign banks) in India as a capital adequacy
measure. Under this banks will have to achieve a Capital to Risk
Weighted Asset ratio (CRAR) of 8 percent. By March, 1996 out of 27
public sector banks 19 banks (including SBI and all its subsidiaries)
have attained 8 percent CRAR norm. In case of foreign banks, all of
them have already attained these norms.
(iv) New prudential norms for income recognition, classification of
assets and provisioning of bad debts introduced in 1992.
(v) In regard to regulated interest ratio structure: (i) considerable
rationalisation has been effected in banks lending rates with the
number of concessive slabs reduced and some of the ratio have been
raised thereby reducing the element of subsidy; (ii) regulated
deposit late has been replaced by single prescription of not
exceeding 13 (revised to 11 percent) per annum for all deposit
maturities of 46 days and above.
(vi) The SBI and some other nationalised banks have been allowed
to seek capital market access.
(vii) Less strong nationalised banks are being recapitalised by
government through budget provisions of Rs. 15000 crore till 199495.
(viii) Existing private sector banks given signal for expansion, more
private sector banks allowed to set up branches provided they
confirms to the RBI guidelines.
(ix) Supervision system of the RBI is being strengthened with
establishment of new board for Financial Bank Supervision within
the RBI.

(x) Banks given freedom to open new branches and upgrade

extension counters on attaining capital adequacy norms and
prudential accounting standards. They are permitted to close nonviable branches other than in rural areas.
(xi) Rapid computerization of banks being undertaken.
(xii) Agreement signed between the public sector bank and RBI to
improve their managerial and quality of performance.
(xiii) Recovery of debts due to banks and the Financial Institution
Act 1993 recently passed to facilitate quicker recovery of loans and
arrears. Accordingly 6 special Debt Recovery Tribunals were set up
along with an Appellate Tribunal at Mumbai to expedite the
recovery of bank loan arrears.
(xiv) Under the Banking Ombudsmen Scheme 1995. Eleven
Ombudsmen already functioning out of a total of 15 to expedite
inexpensive resolution of customers complaints.
(xv) Ten new private banks have started functioning out of the
thirteen in principle approvals given for setting up new banks in
private sector.