ASSIGNMENT 01

INTRODUCTION
Narasimham committee was formed in the year 1991-1998 in order to study the drawbacks of the Indian financial system and to suggest some recommendation for the enhancement in the efficiency and productivity of the banking system. Problems recognized by The Narasimham Committee Directed Investment Programme : The committee objected to the system of keeping high liquid assets by commercial banks in the form of cash, gold and the government securities. It is known as the Statutory Liquidity Ratio (SLR). In those days, in India, the SLR was high as 38.5 %. According to the M. Narasimham's Committee this was one of the reasons for the poor profitability of the banks. Similarly, the Cash Reserve Ratio- (CRR) was high as 15 %. Taken together, banks needed to maintain 53.5 % of their funds idle with the RBI. Directed Credit Programme : While nationalization the government has encouraged lending to agriculture and small-scale industries at a concessional interest rate. It is known as the directed credit programme. The committee suggested that these sectors have matured and thus do not required such financial support. This directed credit programme was flourishing from the government's point of view but it affected commercial banks in bad manner .Banks were given a huge target of priority sector lending, etc. eventually leading to profit erosion of banks. Interest Rate Structure: The committee found that the rate of interest in India are highly regulated and controlled by the government. They found that government used bank funds at a low-priced rate under SLR. At the same time government advocated the beliefs of subsidized lending to certain sectors. The committee felt that ther e was no need for interest subsidy. It made banks handicapped for building main force and expanding credit supply.

Other Suggestions Committee also suggested that determination rate of interest should be on grounds of market forces. It added suggestion to minimize the rate of interest.

The committee recommendations are as follows :
i. Decrease in the rate of SLR and CRR : The committee recommended the reduction of the high percentage of the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR). Both of these rates were very high at that time.ie. SLR then was 38.5% and CRR 15%. This high sum of SLR and CRR meant giving the bank resources for government uses only. It was obstruction in the productivity of the bank .Thus the committee recommended that there should be gradual reduction in SLR from 38.5% to 25% and CRR from 15% to 3 to 5%. Phasing out Directed Credit Programme : In India, since nationalization, directed credit programmes were adopted by the government. The committee suggested phasing out of this programme. This programme forced banks to set aside their financial resources for the needy and poor sectors at concessional rates of interest. It was reducing the profitability of banks and thus the committee recommended stopping this programme.

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Interest Rate Determination: The committee felt that the interest rates in India are controlled by the government. The determination of the interest rate should be based on the market forces such as the demand for and the supply of fund. Hence committee recommended eliminating government controls on interest rate. Structural Reorganization of the Banking Sector : The committee recommended that the numbers of public sector banks need to be reduced. Three to four big banks including State Bank of India (SBI) should be developed as international banks. 8 to 10 Banks having nationwide existence should focus on the national and universal banking services. Local banks should focus on region specific banking. Regarding the RRBs (Regional Rural Banks), it recommended that they should focus mainly on agriculture and rural financing. They recommended that the government should guarantee that in future there won't be any nationalization and private and foreign banks should be allowed liberal entrance in India. Establishment of the ARF Tribunal : The percentage of bad debts and Non-performing assets (NPA) of the public sector Banks was very alarming in those days. The committee recommended for the establishment of an Asset Reconstruction Fund (ARF). This fund will take over the part of the bad and doubtful debts from the banks and financial institutes. It would help banks to get out of bad debts. Removal of Dual control: Banks were under the control of the Reserve Bank of India (RBI) and the Banking Division of the Ministry of Finance (Government of India). It recommended that the RBI should be the only major agency to regulate banking in India.

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Banking Autonomy : The committee suggested that the public sector banks should be free and autonomous. In order to practice competitiveness and efficiency, banks must enjoy autonomy , so that they can improve the work culture and banking technology upgradation will become easy.

Recommendations of Narasimham Committee Report 2 i. Strengthening power of Banks in India : The committee recommended the stronger banking system in the framework of the Current Account Convertibility (CAC) . It considered that Indian banks must be capable of handling problems related to domestic liquidity and exchange rate management in the light of CAC. Thus, it recommended the mergers of small banks into strong banks which will have 'multiplier effect' on the industry.

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Narrow Banking Concept should be introduced: Those days many of the public sector banks were facing a problem of Non-Performing Assets (NPAs). Some of them had NPAs which were as high as 20% of their assets. Thus for successful rehabilitation of these banks the committee recommended 'Narrow Banking Concept' where weak banks will be allowed to place their money only in short term and risk free assets. Capital Adequacy Ratio: In order to improve the natural strength of the Indian banking system committee suggested that the Government should raise the prescribed capital adequacy norms. Currently the capital adequacy ratio for Indian banks is at 9 %. Bank ownership: The freedom for the banks in its operations and bank autonomy, it felt that the government control over the banks in the form of management, ownership and bank autonomy does not go hand in hand Therfore it recommended a review of functions of boards and enabled them to accept professional corporate strategies. Review of banking laws: The committee suggested that there was a need of review and amendment in main laws governing Indian Banking Industry like RBI Act, Banking Regulation Act, State Bank of India Act, Bank Nationalization Act, etc. This upgradation will take them in line with the present requirements of the banking sector in India. Apart from these major recommendations ,committee has also suggested faster computerization, technological upgradation, training of staff, depoliticizing, professionalism in banking operations, review bank recruitment etc.

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FUNCTIONS OF RESERVE BANK OF INDIA

Monetary Policies – RBI formulates implements and monitors the monetary policies for maintaining price stability and to ensure adequate flow of credit to different sectors. Regulation and supervision of the financial system of the country     RBI prescribes a parameter for banking operations within which banks and the financial systems have to function. It maintains the public confidence in the banking system, provide protection to the depositors and provide cost effective banking services to the public. It regulates and supervises the payment systems. It lays down standards standards for payment system operations.

Manage Foreign Exchanges It manages the foreign exchange management Act, 1999 for facilitating external trade and payments and maintence of foreign exchange market. Issue currency notes It issue currency note and coins for the circulation. It provides adequate quantity of supply of currency notes in the market. Development Banker Provide loans to the banks when bank required liquidity