The Recommendations of Narasimham Committee

Presented by: Ankit Jain

Banks Nationalization  EffectsEffects1. bad portfolios performance. 3. Despite impressive quantitative achievement.low achievementefficiency and productivity. 2. Several public sector banks and financial institutions were incurring losses year after year. and eroded profitability. Phenomenal increase in the geographical coverage of our banking and financial institutions.Emerging Problems post Nationalization 19691969.  .

ReviewReview. former RBI Governor to review the Financial System.aspects relating to the Structure. Organization. over staffing. Until recently.   . low technological level in operations. the lack of competitiveness vis-à-vis global visstandards. Procedures and Functioning of the financial system.Narasimham Committee  1991 -RBI proposed the committee chaired by M. high NPAs and low levels of motivation had shackled the performance of the banking industry. Narasimham.

the Committee submitted two reports. in 1992 and 1998. Constituted in 1991. which laid significant thrust on enhancing the efficiency and viability of the banking sector. The Narasimham Committee laid the foundation for the reformation of the Indian banking sector.  .

Problem Areas      Higher rates of CRR(15%) and SLR(38.5%) Directed credit programmes Political and Administrative interference Subsidizing of credit Mounting expenditures of banks .

The main recommendations of the Committee were:     Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years Progressive reduction in Cash Reserve Ratio (CRR) to 3-5% 3Phasing out of directed credit programmes and redefinition of the priority sector Stipulation of minimum capital adequacy ratio of 8 per cent by March 1996. asset classification and provisioning against bad and doubtful debts . (Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures.)  Adoption of uniform accounting practices in regard to income recognition.

        Setting up of special tribunals to speed up the recovery process of loans Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount Abolition of branch licensing Liberalizing the policy with regard to allowing foreign banks to open offices in India Giving freedom to individual banks to recruit officers Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks Speedy liberalization of capital market Enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down prudential norms for such institutions. . etc.

Narasimham as chairman of one more committee. . recasting bank board.Committee On Banking Sector Reforms 1998     19981998. bank likemergers. This committee was asked to ³review the progress of banking sector reforms to date and a programme on financial sector reforms to strengthen India's financial system and make it internationally competitive´.capital adequacy. and creation of global sized banks. The report covered issues like.Finance minister appointed Mr. The committee submitted its report to the government in April 1998.

.Major Recommendations of Narasimham Committee 1998      Need for stronger banking system Experiment with concept of narrow banking Small local banks Capital Adequacy Ratio Review and update banking laws.

So committee recommended the merger of strong banks which would have a µmultiplier effect¶ on industry. . which would involve large inflows and outflows of large capital and consequent complications for exchange rate management and domestic liquidity. But has rejected the merger of weak banks with strong banks as it may have a negative impact on the asset quality of the stronger bank. The committee has also supported that two or three large Indian banks be given international or global character.Need for stronger banking system     The committee has made clear the need of a stronger banking system .

small industry.  . these banks should have strong corresponding relationship with the larger and international bank. and agriculture. local banks which would be confined to states or clusters of districts in order to serve local trade. At the same time.Small Local Banks  The committee has suggested setting up of small.

Experiment with concept of narrow banking  Serious concern for rehabilitation of weak PSBs which have accumulated a high percentage of NPAs in some cases as high as 20% of the total assets.these banks try to riskassetsmatch their demand deposits with safe liquid assets   . Committee suggested the concept of narrow banking to rehabilitate weak banks. Narrow banking means that the weak banks place their funds only in the short term in risk-free assets.

Capital Adequacy Ratio  The committee has also suggested that the government should consider raising the prescribed capital adequacy ratio to improve inherent strength of banks and to improve their risk absorption capacity. .

Banks Nationalization Act.  Committee has suggested an urgent need to review and amend the provisions of RBI Act.Review and update banking laws. . etc so as to bring them in line with the current needs of the banking industry.

training and remuneration policies. professionalizing and depoliticizing bank boards. review of recruitment procedures.Other recommendations  Other recommendations relate to the need for automation of PSBs. real autonomy etc .

Thank You .

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