Narasimham is the most powerful banker of India post-independence.

The way his reports –

Narasimham Committee on Financial System (1991) and the Narasimham Committee on Banking
Sector Reforms (1998) transformed the functionality of the Indian Banking sector is commendable.
He is also known for pioneering historical events such as bank mergers, asset reconstruction firms and
the emergence of new-generation private banks.

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 CRR

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,

1998
Some recommendations of the Narasimham committee are as follows:

Narrow banking
The public sector banks were facing a high incidence of bad debts and non performing
assets. The non-performing assets level was as high as 20% in some banks. In order to
solve this problem, this committee introduced a new concept named arrow banking. As a
part of this, highly impacted financial institutions will be allowed to put their funds in risk
free assets.

Government ownership
The earlier report had recommended granting greater autonomy to banks so that they can
perform in a professional manner. However, government ownership and autonomy did
not go hand in hand. Therefore, it suggested that government should divest controlling
stake in most PSBs and allow banks to function independently.

Capital adequacy ratio

The capital adequacy ratio is the percentage of capital with respect to risk weighted
liabilities and assets of a bank. Indian banking system was structurally very weak and it
could not absorb shocks. Therefore, to build its capacity and inherent strength, the
committee recommended increasing the capital adequacy requirements of banks and other
financial institutions.

Strong banking system

The committee was of the firm view for stronger and more resilient banks which can
compete with large multi national banking companies. It advocated for the creation of
strong banks by merging two or more banks. However, it cautioned against merging
strong banks with weaker institutions as it will defeat the purpose of reforms.

Change in RBI’s role

There should be a reform in RBI’s role as well. The Reserve Bank of India should
function only as a regulator or administrator of India’s financial system by forming rules
and regulations and ensuring its compliance. It should divest any controlling stake it has
in banks and other financial institutions.

Non-performing assets
With burgeoning NPAs, sustainability of the Indian banking system was under threat.
Narasimham committee recommended reducing the total gross NPA of the banking sector
to 3% by 2002. In order to achieve the same, it suggested the establishment of asset
reconstruction companies. The government of India passed “Securitization and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act” SARFAESI Act 2002 in order to incorporate these
recommendations.

Foreign banks
The earlier committee had already opened the doors for foreign banks in India. Moving
ahead on that development, the second Narasimham committee suggested that minimum
start-up capital for foreign banks should be raised from $10 million to $25 million.