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 14th August 1991, Government of India appointed a nine-member team called the
Narasimham Committee I. Its chairman was Maidavolu Narasimham.
● From 2nd May 1977 to 30th November 1977, Narasimham remained the 13th 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 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)
In order 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 was submitted its report on 23rd April 1998 by the
finance minister of 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 the 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 reduction of NPAs and also put in place
risk management systems and practices to prevent re-emergence of fresh NPAs.
● Banks are permitted to issue bonds for augmenting 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.

For the Best preparation strategy for competitive exams candidates can visit the linked
article and get detailed study material and preparation tips to excel in the examination.
Frequently Asked Questions about Narasimham
Committee

Q1 Who led the Narasimham Committee II?

Narasimham Committee II was headed by Narasimham under then finance minister P

Chidambaram in 1998.

Q2 Name two committees other than Narasimham Committee

that recommended reforms in the banking sector in India.

Two committees other than Narasimham Committee that recommended reforms in the
banking reforms are- AK Bhuchhar Committee and Urjit Patel Committee.

Q3 Who regulates the money supply in India?

RBI regulates the money supply in India.