NARASIMHAM

COMMITTEE
BY: PRANAV DAGAR
2019PBA9202
MBAC401
  A nine member committee Headed by Mr. M. Narasimham,
who was the 13th Governor of RBI
 First Committee, known as Narasimham Committee I, was
appointed in August 1991, against the backdrop of the Balance
of Payment Crisis
INTRODUCTI  Set up to analyze all factors related to financial system and give
ON recommendation to improve its efficiency and productivity
 The Second Committee, Known as Narasimham Committee II,
was appointed in 1998
 It was given the task to review the implementation of the
Banking Sector Reforms
  Interest Rate Structure : The committee found that the interest
rate structure and rate of interest in India are highly regulated
and controlled by the government.
 Additional Suggestions : Committee also suggested that the
Problems determination of interest rate should be on grounds of market

Identified By forces.

The Narasimham  Directed Credit Programme : Since nationalization the

government has encouraged the lending to agriculture and
Committee small-scale industries at a confessional rate of interest.
 Directed Investment Programme : The committee objected to
the system of maintaining high liquid assets by commercial
banks in the form of cash, gold and government securities.
  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.
 Phasing out Directed Credit Programme : In India, since
Narasimham nationalization, directed credit programmes were adopted by

Committee the government. The committee recommended phasing out of

this programme.
Report I - 1991  Interest rate determination : The committee felt that the interest
rates in India are regulated and controlled by the authorities.
The Committee observed that the prevailing structure of
administered rates was highly complex and rigid and called for
deregulating.
  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
 Establishment of the ARF Tribunal : The proportion of bad

Continued: debts and Non-performing asset (NPA) of the public sector

Banks and Development Financial Institute was very alarming
in those days.
 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
 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.
  The 2 nd Narasimham Committee was set up by
P.Chidambaram as Finance Minister of India in December 1997
 It is also known as the Committee on Banking Sector Reforms
 The Committee submitted the report to the Finance Minister
Narasimham Yashwant Sinha in April 1998

Committee  Strengthening Banks in India : The committee considered the

Report II - 1998 stronger banking system in the context of the Current Account
Convertibility 'CAC’.
 Narrow Banking : Those days many public sector banks were
facing a problem of the Nonperforming assets (NPAs). Some of
them had NPAs were as high as 20 percent of their assets.
  Capital Adequacy Ratio : In order to improve the inherent
strength of the Indian banking system the committee
recommended that the Government should raise the prescribed
capital adequacy norms.
 Bank ownership : As it had earlier mentioned the freedom for
banks in its working and bank autonomy, it felt that the

Continued: government control over the banks.

 Review of banking laws : The committee considered that there
was an urgent need for reviewing and amending main laws
governing Indian Banking Industry like RBI Act, Banking
Regulation Act, State Bank of India Act, Bank Nationalisation
Act, etc. This upgradation will bring them in line with the
present needs of the banking sector in India.
 Apart from these major recommendations, the committee has
also recommended faster computerization, technology
upgradation, training of staff, depoliticizing of banks,
professionalism in banking, reviewing bank recruitment, etc.
  During the 2008 economic crisis, performance of Indian
banking sector was far better than their international
counterparts
 RBI raised Capital Adequacy Ratio by 1%
Conclusion  Rapid computerization of the banks was adopted.
 RBI started helping the commercial banks to improve the
quality of their performance.
 17 banks were considered eligible for autonomy
  In case of Yes Bank in year 2015 RBI decided to conduct an
asset quality review (AQR) of the balance sheets of the banks.
Yes bank’s NPAs were consistently below 2%. In its AQR, RBI
found 5.5x more NPA’s in Yes Bank’s books than disclosed by
the bank in FY17.
 The gross NPA of the bank for the last five years were recorded

Example at ₹748.98 crore (2016), ₹2,018.56 crore (2017), ₹2,626.80

crore (2018), ₹7,882.56 crore (2019) and ₹32,877.59 crore
(2020).
 At present, an SLR of 18 per cent and CRR of 3 per cent is
prescribed.