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NARASIMHAM COMMITTEE RECOMMENDATIONS 1991

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;

Three or four large banks including SBI should become international in character. Eight to ten banks should national bank with wide network of branches through out the country. Tahe rest should remain as local banks with operations be confined to a specific region. 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. Foreign banks are allowed to open their branches in India either as fully owned or subsidiaries. This would improve efficiency. Foreign banks and Indian banks are allowed to set-up joint ventures in regard to merchant and investment banking. 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.

Each bank should be free and autonomous. 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.

Over- regulation and over- administration should be avoided and greater reliance should be placed on internal audit and internal inspection. 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. 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. The appointment of chief executive of bank and the board of directors should not be based on political considerations but on professionalism and integrity.

finance ministry of government of India appointed Mr. M. Narasimham as chairman of one more committee, this time it was called as the committee on banking sector reforms. The committee was asked to review the progress of banking sector reforms to the date and chart a programme on financial sector reforms necessary to strengthen Indias financial system and make it internationally competitive. The narasimham committee on banking sector reforms submitted this report to the government in April 1998. This report covers the entire issues relating to capital adequacy, bank mergers, the condition of global sized banks, recasting of banks boards etc. some important findings are as follows;

Need For Stronger Banking System: The narasimham committee has made out a stronger banking system in country, especially in the context of capital account convertibility (CAC) which would involve large amount of inflow and outflow of capital and consequent complications for exchange rate management and domestic liquidity. To handle this India would need a strong resilient banking and financial system. Experiment With The Concept of Narrow Banking: The narasimham committee is seriously concerned with the rehabilitation of weak public sector banks which have accumulated a high percentage of non-paying assets

(NPA), and in some cases, as high as 20% of their total assets. They suggested the concept of narrow banking to rehabilitate such weak banks. Small Local Banks: The narasimham committee has argued that While two or three banks with an international orientation and 8 to 10 of larger banks should take care of their needs of the large and medium corporate sector ad larger of the small enterprises, there will still be a need for a large number of local banks. The committee has suggested the setting up of small local banks which should be confined to states or clusters of districts in order to serve local trade, small industry etc. Capital Adequacy Ratio: The narasimham committee has also suggested that the government should consider raising the prescribed capital adequacy ratio to improve the inherent strength of banks and to improve their risk taking ability. Public Ownership And Real Autonomy: The narasimham committee has argued that government ownership and management of banks does not enhance autonomy and flexibility in working of public sector banks. Accordingly, the committee has recommended a review of functions of banks boards with a view to make them responsible for enhancing shareholder value through formulation of corporate strategy. Review And Updating Banking Laws: The narasimham committee has suggested the urgent need to review and amended the provisions of RBI Act, Banking Regulation Act, State Bank of act etc so as to bring them on same line of current banking needs.

Really speaking there was no purpose of setting up the second he Committee submitted its report in November, 1991 and recommended; 1. Reduction in CRR to 8.5 percent and SLR to 25 percent over a period of about five years.

2. Deregulation of interest rates structure and decreasing the emphasis laid on directed credit and phasing out the concessional rates of interest to priority sector. 3. To raise fresh capital through public issue by the profit making banks. 4. Transparency in Balance sheets 5. Establishment of Special Tribunals to speed up the process of debts recovery 6. Establishment of an Assets Reconstruction Fund with special power of recovery 7. Bank restructuring through evolving a system of a broad pattern consisting of 3 or 4 large banks including SBI, 810 national Banks engaged in Universal Banking with a network of branches, local banks confined to a specific region and RRBs confined to the rural areas engaged in financing of agriculture and allied activities. 8. Abolishment of branch licensing and leaving the matter of opening and closing of branches to the commercial judgment of individual banks 9. Progressive reduction in pre-emptive reserves. 10. Introduction of prudential norms to ensure capital adequacy norms, proper income recognition, more stringent recognition of NPAs, classification of assets based on their quality and provisioning against bad and doubtful debts by constituting the special debt recovery tribunals 11. Introduction of greater competition by entry of private sector banks and foreign banks and permitting them to access capital market 12. Partial deviation from directed lending 13. Strengthening the supervisory mechanism by creating a separate Board for Banking and Financial supervision 14. Up gradation of technology through the introduction of computerized system in banks. 15. Freedom to appoint chief executive and officers of the banks and changes in the constitutions of the board

16. Bringing NBFCS under the ambit of regulatory framework. The Government also appointed another committee on banking sector reforms under the Chairmanship of M. Narasimham which submitted its report in April 1998. The committee focused on bringing about structural changes so as to strengthen the foundations of the banking system to make it more stable. The major recommendations of Narasimham Committee II were1. In case of capital adequacy, strengthening the banking system through an increase in the minimum capital adequacy ratio (CRAR) from 8 percent to 10 percent by 2002, 100 percent of fixed income portfolio marked-tomarket by 2001 (up from 70 percent), 5 percent market risk weight for fixed income securities and open foreign exchange positions limits (no market risks weights previously) and 100 percent commercial risks weight to Government-Guaranteed advances (previously treated as risk free) 2. To bring down net NPAs below 5 percent by 2000 and to 3 percent by 2002. Reducing the minimum stipulated holding of the Government or RBI in the equity of nationalized banks or SBI to 33 percent 1. Merging financially strong institutions and giving a revival package to the weak banks 2. Strengthening the operation of rural financial institutions in terms of appraisal, supervision and follow-up, loan recovery strategies and development of bank-client relationships in view of higher NPAs in public sector banks due to directed lending. 3. Amendment to RBI Act and Banking Regulation Act 4 The Government focused on competition enhancing measures by way of granting operational autonomy to public sector banks, reduction of public ownership in public sector banks by allowing them to raise capital from equity market up to 49

percent of paid-up capital; setting of transparent norms for entry of Indian private sector, foreign and joint-venture banks and insurance companies, giving permission for foreign investment in the financial sector in the form of foreign direct investment (FDI) as well as portfolio investment, giving permission to banks to diversify product portfolio and business activities, to prepare aroadmap for presence of foreign banks and guidelines for mergers and amalgamation of private sector banks, public sector banks and NBFCs, and providing guidelines on ownership and governance in private sector banks. Government focused through reform process on enhancing the role of market forces by making sharp reduction in pre-emption through reserve requirement, market determined pricing for government securities, disbanding of administered interest rates with a few exceptions and enhanced transparency and disclosure norms to facilitate market discipline; introduction of pure inter-bank call money market, auction-based reposreverse repos for short-term liquidity management, facilitation of improved payments and settlement mechanism, and requirement of significant advancement in dematerialization and markets for securitized assets are being developed. A provision was made for introduction and phased implementation of international best practices and norms on risk-weighted capital adequacy requirement, accounting, income recognition, provisioning and exposure, taking suitable measures to strengthen risk management through recognition of different components of risk, assignment of risk-weights to various asset classes, norms on connected lending, risk concentration, application of marked-to-market principle for investment portfolio and limits on deployment of fund in sensitive activities, and Know Your Customer and Anti Money Laundering guidelines, roadmap for Basel II, introduction of capital charge for market risk, higher graded.