Narasimham Committee Report I - 1991

The Narsimham Committee was set up in order to study the problems of the Indian
financial system and to suggest some recommendations for improvement in the
efficiency and productivity of the financial institution.

The committee has given the following major recommendations:-

1. Reduction in the SLR and CRR : The committee recommended the reduction of the
higher proportion of the Statutory Liquidity Ratio 'SLR' and the Cash Reserve Ratio
'CRR'. Both of these ratios were very high at that time. The SLR then was 38.5% and
CRR was 15%. This high amount of SLR and CRR meant locking the bank resources
for government uses. It was hindrance in the productivity of the bank thus the
committee recommended their gradual reduction. SLR was recommended to reduce
from 38.5% to 25% and CRR from 15% to 3 to 5%.

2. Phasing out Directed Credit Programme : In India, since nationalization, directed
credit programmes were adopted by the government. The committee recommended
phasing out of this programme. This programme compelled banks to earmark then
financial resources for the needy and poor sectors at confessional rates of interest. It
was reducing the profitability of banks and thus the committee recommended the
stopping of this programme.


3. Interest Rate Determination : The committee felt that the interest rates in India are
regulated and controlled by the authorities. The determination of the interest rate
should be on the grounds of market forces such as the demand for and the supply of
fund. Hence the committee recommended eliminating government controls on interest
rate and phasing out the concessional interest rates for the priority sector.

4. Structural Reorganizations of the Banking sector : The committee recommended
that the actual numbers of public sector banks need to be reduced. Three to four big
banks including SBI should be developed as international banks. Eight to Ten Banks
having nationwide presence should concentrate on the national and universal banking
services. Local banks should concentrate on region specific banking. Regarding the
RRBs (Regional Rural Banks), it recommended that they should focus on agriculture
and rural financing. They recommended that the government should assure that
henceforth there won't be any nationalization and private and foreign banks should be
allowed liberal entry in India.


5. Establishment of the ARF Tribunal : The proportion of bad debts and Non-
performing asset (NPA) of the public sector Banks and Development Financial
Institute was very alarming in those days. The committee recommended the
establishment of an Asset Reconstruction Fund (ARF). This fund will take over the
proportion of the bad and doubtful debts from the banks and financial institutes. It
would help banks to get rid of bad debts.

6. Removal of Dual control : Those days banks were under the dual control of the
Reserve Bank of India (RBI) and the Banking Division of the Ministry of Finance
(Government of India). The committee recommended the stepping of this system. It
considered and recommended that the RBI should be the only main agency to
regulate banking in India.

7. Banking Autonomy : The committee recommended that the public sector banks
should be free and autonomous. In order to pursue competitiveness and efficiency,
banks must enjoy autonomy so that they can reform the work culture and banking
technology upgradation will thus be easy.
Some of these recommendations were later accepted by the Government of India and
became banking reforms.
The Committee was first set up in 1991 under the chairmanship of Mr. M. Narasimham
who was 13th governor of RBI. Only a few of its recommendations became banking
reforms of India
As far as recommendations regarding bank restructuring, management freedom,
strengthening the regulation are concerned, the RBI has to play a major role. If the
major recommendations of this committee are accepted, it will prove to be fruitful in
making Indian banks more profitable and efficient.




The narasimham committee (1991) assumed that the financial resources of the
commercial banks from the general public and were by the banks in trust and that the
bank funds were to be deployed for maximum benefit of the depositors. This
assumption automatically implied that even the government had no business to
endanger the solvency, health and efficiency of the nationalized banks under the pretext
of using banks funds for social banking, poverty eradication, etc. Accordingly, the
narasimham committee aimed at achieving three major changes in the banking sector in
India;
y Ensuring a degree of operational flexibility.
y Internal autonomy for the banks in their decision making process.
y Greater degree of professionalism in banking operations.
Towards this end, narasimham committee recommendations covered such subjects as
directed investments, directed credit programmes, structural of rate of interest,
structural reorganization of the Indian banking system, and organization, methods and
procedures of banks in India.
In Structural Reorganization of The Banking System
To bring about greater efficiency in banking operations, the narasimham committee
(1991) proposed substantial reduction in number of public sector banks through
mergers and acquisition. According to committee, the broad pattern should consist of;
y Three or four large banks including SBI should become international in character.
y Eight to ten banks should national bank with wide network of branches through out the
country.
y The rest should remain as local banks with operations be confined to a specific region.
y RBI should permit the establishment of new banks in the private sector, provided they
conform to the minimum start-up capital and other requirements. The government
should make declaration that no further banks be nationalized.
y Foreign banks are allowed to open their branches in India either as fully owned or
subsidiaries. This would improve efficiency.
y Foreign banks and Indian banks are allowed to set-up joint ventures in regard to
merchant and investment banking.
y Since the country had already a network of rural and semi-urban branches, the system
of licensing of branches with the objective of spreading the banking habit should be
discontinued. Banks should have freedom to open branches.
On Organization And Methods And Procedures In Banks
In order to tone up the working of the banks, the narasimham committee (1991)
recommended that;
y Each bank should be free and autonomous.
y Every bank should go for a radical change in working technology and culture, so to
become competitive internally and to be in step with wide- ranging innovations taking
place.
y Over- regulation and over- administration should be avoided and greater reliance
should be placed on internal audit and internal inspection.
y The various guidelines issued by government or RBI in regard to internal
administration should be examined in the context of the independence and autonomy
of bank.
y The quality of control over the banking system between RBI and the banking division
of ministry and finance should end forthwith and RBI should be the primary agency for
regulation.
y The appointment of chief executive of bank and the board of directors should not be
based on political considerations but on professionalism and integrity.
So despite impressive quantitative achievements in resources mobilization and in
extending the credit reach, several distortions had crept into the banking system over
the years. Several public sector banks had become weak financially and were unable to
meet the challenges of the competitive environment. The narasimham committee was
forthright in apportioning the blame to the government of India and the finance ministry
of this sad state of affairs. The public sector banks has been used and abused by the
government, the officials and the bank employees and the trade unions. The
recommendations of narasimham committee(1991) has been revolutionary in many
aspects and were opposed by trade unions and even by finance ministry of central
government and of course, the progressive economist who generally championed the
public sector banks. The government however accepted many of the recommendations
of the narasimham committee (1991).