Narashimham Committee on banking system in India

Post 1991 economic crisis in India, it was felt that banks had a crucial role to play in the economy and that banks in India were not performing efficiently. The Government took several steps to remodel the country’s financial system. For that, Dr.Manmohan Singh, then finance minister, initiated revamping the banking sector in India. A high-level committee was appointed with the chairmanship of Mr. M. Narsimham (former RBI Governor) to examine all the aspects of the financial system and recommend reforms to safeguard the banking sector. Later on, in 1998 there was another Committee was formed, this time under P Chidambaram as the finance minister. The committee was again headed by Narasimham. The first Committee set up in 1991 is referred to as the Narasimham Committee- I and the 1998 Committee is known as the Narasimham Committee – II.

The first Narasimhan Committee made the following recommendations in its report submitted during November 1991, for the growth of the banking sector.

 1.  Re-organisation of the existing Indian banking system with 3 or 4 major public sector banks at the top and rural development banks for agricultural activities at the bottom. The recommendation includes the privatization of financial institutions.

2. Review of Supervisory Arrangement and formation of a  separate quasi-autonomous body under RBI for supervising banks and financial institutions

 3. Reduction in statutory liquidity ratio

4. Reaching of 8% capital adequacy ratio:  

5. Deregulation of Interest rates

6. Full discloser banks’ accounts and proper classification of assets

7. Setting up Asset Reconstruction fund

 Narasimham Committee- II

The Narasimham Committee- II is also known as the Banking Sector Committee. The task of the Committee was to review the progress of the implementation of reforms and to suggest a design for further strengthening of the sector.

 The major recommendations submitted by the Committee were:

1. Stronger banking system:

One of the recommendations was the merger of major public sector banks that would boost international trade. At the same time, the Committee warned against merging stronger banks with weaker banks.

• Narrow Banking:

Some of the public sector banks at that time had the problem of high non-performing assets (NPAs). For the successful rehabilitation of such banks, the Committee recommended the Narrow Banking Concept where the banks were allowed to put their funds in short-term and risk-free assets. The above recommendations led to placing such Banks under the Prompt Corrective Action (PCA) framework by RBI. After the imposition of PCA, all the Banks have made significant improvements resulting in the removal of each one of them from the PCA restrictions.

• Reform in the role of RBI:

The Committee also recommended reforms in the role of the RBI in the banking sector. The Committee felt that RBI being the regulator, should not have ownership in any bank.

• Government ownership:

The committee recommended that government ownership of banks should be reviewed as it hampers the autonomy of banks resulting in mismanagement.

• Non-performing Assets (NPAs):

The Committee wanted the banks to reduce their NPAs to 3% by 2002. It also recommended the formation of Asset Reconstruction Funds or Asset Reconstruction Companies. The recommendations led to the introduction of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Indian banks’ gross NPAs hit an all-time low and may fall below 3% by FY24 end. The GNPA ratio of scheduled commercial banks reduced to 3.0% as of December 31, 2023, from 4.6% over a year ago and may drop to 2.80%-2.90% by FY24 end.

6. Capital Adequacy Ratio (CAR): The committee also proposed that the government should raise the Capital Adequacy Ratio norms. The Basel III Norms have prescribed a CAR of 8%. In India, the Reserve Bank of India (RBI) mandates the CAR for scheduled commercial banks to be 9%, and for public sector banks, the CAR to be maintained is 12%.

7. Startup capital of foreign banks:  The committee recommended raising the minimum start-up capital to $25 million for foreign banks from $10 million.

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