Recommendations of the Narasimham Committee on Banking Sector Reforms

Narasimham Committee on Banking Sector Reforms, First Narasimham Committee, Second Narasimham Committee, Banking Sector Reforms in India, narasimham committee upsc
Banking Sector Reforms in India

The Narasimham committee on banking sector reforms plays a vital role in the Banking sector growth and the government directed this committee for 2 times once in 1991 and 1998 to improve the efficiency of the banking sector in the country.

In 1969, RBI has Nationalized from then the expansion took place in a vast geographical area through the financial system. Within 1 year of time, many public sector banks and financial institutions were faced with losses.

There were many problems and could not sustain in a competitive world, hence the government of India took a decision to set up a committee under the chairmanship of former Governor Mr. M. Narasimham to suggest suitable changes in the banking sector.

Aims of the Narasimham Committee

The main aims of Narshimha Committee of 1991 are as follows:

  • Operational flexibility was the first aim ensuring in a greater degree.
  • Public sector banks to stand autonomously in the process of Decision Making.
  • Professionalism in Banking operations

Recommendations of the Narasimham Committee of 1991

In 1991, the 9 member committee on the financial system submitted their report in November 1991 with the following recommendations.

1. Statutory Liquidity Ratio (SLR)

The committee recommended that the government must reduce the SLR from 38.5% to 25% over the next five years.

2. Cash Reserve Ratio (CRR)

The cash reserve ratio must be reduced from 15% to 3-5%. So that the banks can use more funds for advancing loans.

3. Directing Credit Programmes

The Narshimham committee of 1991 recommended that the system of directed credit programmes should be gradually phased out.

The priority was given to farmers, rural, artisans, village and cottage industries, etc.. to fix 10% aggregate bank credit.

4. Structure of Interest Rates

On the level and structure of interest rates, the committee recommended that they should be determined by market forces and all controls and regulations on interest rates should be eliminated.

5. Structural Reorganization of the Banking Sector

The committee recommended that the banks should be restructured so as to create.

a) 3 or 4 major and large banks which could have an international character.

b) 8 to 10 national banks with a nationwide branch network, local banks for regional operations, and rural banks at the bottom end.

6. Nationalization of Banks

The committee recommended that there should be no Nationalization of banks in the future.

7. Setting up of new Banks

The committee said that RBI should allow the creation of new banks in the private sector, as long as they meet the minimum capital and other requirements.

8. Removal of Dual Control

The Narasimham committee recommended that the dual banking system between RBI and the Banking Division of the Ministry of Finance should be ended immediately.

9. Foreign Banks

The Narasimham committee recommended that the government should allow foreign banks to open offices in India, either as branches or as subsidiaries.

10. Autonomy to Banks

This committee recommended that the public sector banks should be made free and autonomous.

11. Disinvestment

The committee recommended that a percentage of the shares of public sector banks should be disinvested like other PSU’s.

12. Rural Banking Subsidiaries 

Ever public sector should set up one or more rural banking subsidiaries to take over all its rural branches.

13. Recruitment of Staff

The committee stated that appointments to the key posts should be kept safe from political favors and that the CEO of a bank should be appointed by a group of the independent panel of experts. They should be appointed by the panel of experts.

14. Computerization

The committee recommended to speed up computerization of banking services to improve their efficiency and to boost competition.

Also read: Functions of Reserve Bank of India

Recommendations of the Narasimham Committee of 1998

This committee was set up under the chairmanship of Narasimham with the name “Committee on Banking Sector Reforms” which is also known as “Second Narasimham Committee”.

This committee submitted their report on 23rd April 1998. It covers various issues like bank mergers, recasting of bank boards, changing rules, and more…

  1. Strengthening Banking System

The committee examined the strengthening of the banking system in the context of the convertibility of the Capital Account Convertibility “CAC”.

This would imply important inflows and outflows of capital and the consequent complications for the management of the exchange rate and internal liquidity.

Hence, it recommended the merger of strong banks, point to be noted here is they were against the merger of strong and weaker banks.

2. Narrow Banking

The committee was focusing on rehabilitation of weaker public sector banks with the accumulation of a high percentage of non-performing assets(NPA).

The concept of narrow banking indicates that weak public sector banks should only invest in short-term risk-free assets, and match their demand deposits with liquid assets.

It also said narrow banking may not be helpful to rehabilitate weak branches and closure of such banks should be examined.

3. Capital Adequacy Ratio

The Committee discussed the issue of increasing the capital adequacy ratio required to improve the intrinsic strength of banks and their ability to absorb risk and to propose higher capital adequacy requirements for banks and create an asset reconstruction fund to take over the bad debts of the banks.

4. Bank Ownership

The committee argued that the ownership of the government and the administration of the banks did not improve the authority and flexibility of the operation of public sector banks.

Therefore, the committee recommended that the functions of the banking board be reviewed so that they retain the responsibility of improving the value of the shareholders through the formulation of corporate strategies.

5. Review of banking laws

The Committee suggested an urgency to review and amend the main laws that govern the banking sector in India, such as the RBI Act, the Banking Regulation Act, the Bank of India Act, the Bank Nationalization Act, etc. these up-gradation helps to meet the needs of present-day conditions.