Narasimham Committee
AKSHAY THAKUR
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 nine-member 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 non-performing 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
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
Implementation:
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
Thank You
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