Narsimham Committee II Report.

Critically weighing its recommendations.

 This presentation shall cover..

 Brief overview of the recommendations.

 Their Ramifications ,a critical view.
 Criticisms.
 Narsimham Committee II
 This Committee is also
called the “Committee
on Banking Sector
Reforms”
 Appointed by Central
Government .
 Was headed by Shri
M. Narasimham.
Shri. M .Narsimham
 The Committee
submitted its report on
23.4.1998.
 Recommendations.
 Three Tier Banking: There should be three types of banks: ( i ) Two or three
large Indian Banks with international character; ( ii ) Eight or Ten large
National Banks to take care of the needs of large/medium corporate sector, and
(iii ) Large or Local Area/ Regional Banks to serve local trade, small industry and
agriculture.

 Universal Banking: The distinction between Development Finance Institutions

and commercial banks should disappear paving the way for universal banking.
DFIs should also give working capital finance while commercial banks term loans.

 Narrow Banking : Weak banks whose accumulated losses and net NPAs exceed
their capital funds can be rehabilitated by branding them as “Narrow Banks”
(banks which restrict their operation to only certain activities).

 Mergers: Merger among the banks to be encouraged especially among the strong
banks to obtain “ Force Multiplier Effect”.
 Govt. Holding in Banks: Govt. holding in banks should be reduced to 33%
The Govt. should not disinvest its capital. The capital should be increased by
market subscription to bring down the Govt. holding to 33%.

 Capital Adequacy Requirement: The Capital Adequacy ratio should be

increased from existing 8% to 9% by 2000 AD. And to 10% by 2002.( Since
accepted) The start up capital for new private banks be increased.

 Asset Classification: An account should be classified as NPA if interest or

installment is not serviced for a period of 90 days.

 Provision Requirement: Banks should make general provision of 1% on their

standard assets.

 Directed Credit: The directed credit should also encompass other areas of
credit like food processing, fisheries, dairy,etc.

 Autonomy to Banks: Functional autonomy should be given to the banks . The

appointment of M.D./ Chairman should be left to the Board of the banks.

 Recruitment Policy: The recruitment procedure and remuneration policies

should be changed to attract specialized officers.
 Other Recommendations.
 To revamp existing banking laws, particularly RBI Act,
BR Act , SICA, etc;
 Setting up of ARC ( Asset Reconstruction Fund for bank
NPAs)
 Segregating regulatory & supervisory function of RBI;
 RBI should become a regulator and maintain arms length
from banks. No RBI nominee in Boards of Banks;
 Autonomy Status for Board for Financial Supervision ;
 Professionalisation of Bank Boards;
 Thrust on technology up gradation
 Criticisms Against..
 Government holding in banks:
Narasimham Committee viewed that ensuring the integrity and autonomy of
public-sector banks is the more relevant issue and that they could improve
profitability and efficiency without changing their ownership if competition were
enhanced. Since this approach was introduced, some criticisms have been expressed
(Joshi and Little 1996).
First, public-sector banks continue to be dominant thanks to their better branch
coverage, customer base, and knowledge of the market compared with newcomers.
Second, public-sector banks would find it more difficult to reduce personnel
expenditure because of the strong trade unions.
Third, the government would find it difficult to accept genuine competition within
public-sector banks.
In response to these concerns, the government decided to gradually expand private-
sector equity holdings in public-sector banks, but still avoided the transformation of
their ownership. Consequently, public-sector banks, which used to be fully owned
by the government prior to the reform, were now allowed to increase non
government ownership. So far, only eight public-sector banks out of 27 have
diversified ownership.
 Criticisms Against..
 Directed Credit program: The argument is that directed credit programme
have made for low commercial profitability of the system on account of 1)
rising loan delinquencies 2) lack of adequate credit business in semi urban and
rural branches 3)and concessional interest rates.

 Capital Adequacy Requirement: Narasimham-II had argued that with the

difficulties that Indian banks would
have with implementing international risk management guidelines it may be
best to move to a 10 per cent capital to risk assets ratio (CRAR). Some
observers have argued that raising the CRAR further, beyond the present 9
per cent, would be counterproductive in an already risk-averse Indian
financial system.

 The legislative framework should be made a lot more flexible to give the
regulatory/supervisory authority sufficient powers to adequately deal with
rapid financial innovations.
Future of Financial Institutions
The future of financial institutions has been the centre of debate for
the past many years.
NarasimhamII had set out that the FIs should either become banks or
NBFCs.

What is emerging is a cafeteria approach under which a FI can either

itself become a bank or use the conglomerate approach and set up a
banking subsidiary. The present environment is excessively
permissive. There must be an incentive/disincentive system and FIs
should be given a clear outer time frame by which they would have to
become banks.

The FIs are far too big to be allowed to function outside the regulatory
framework for banks, and yet enjoy a favorite son status.
 From the Man Himself..
“No reform can indeed be painless. We have to appreciate
that the quest for competitive efficiency will take its toll
of the weak and the inefficient. These pains, however,
are a necessary foundation for the emergence of a
strong and viable financial system, which will conform to
best international practices and make its distinctive
contribution to the furtherance of our national objectives
of growth, justice and external viability.”

- Sri M. Narsimham.
 THANK YOU
References:
 www.articlesbase.com/banking
.../analysis-of-indian-financial-reforms.
 www.unescap.org/drpad/publication/fin

 www.rbi.org.in/rdocs/Publicationreport
 THE MALAISE OF THE INDIAN FINANCIAL SYSTEM : THE
NEED FOR REFORMS by S.S. Tarapore
 THE INDIAN FINANCIAL SYSTEM AND DEVELOPMENT-Dr. Vasant
Desai.
 INDIAN FINANCIAL SYSTEMS ,M. VOHRA