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1.12 NARASIMHAM COMMITTEE RECOMMENDATIONS, ON FINANCIAL REFORMS, 1.12.1 Narasimham Committee Report 1991-98—Recommendations, , Ge 1991. the Government of India appointed a committee under the Chairmanship of Shri M. Narasimham, a atanene all aspects relating to the structure, organization, functions and procedures of the financial, system. The Deputy Governor, RBI (banking operations), Chairman of SBI, [DBI, ICICI, Shri Manu, , L, Shroff Shri Y. H. Melegam, Shri Mrinal Datta Chaudhuri and the additional secretary (banking) were, , i, , wath, , the m . ; ; ; ;, a of the committee. The committee can be described as a committee on financial sector, aa, oer 4. Narasimham also headed the second committee to review financial sector reforms, 3 its re ~, uPmitted its report in April 1998, the first committee may be called Narasimham Committee-I, , and the, 1998 committee be called Narasimham Committee-ll., , 112.2, r. Ftoblems Identified hv the Naracimham Cammitten

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1.12.3 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, imstitulen, , The committee has given the following mayor recammendauons, , + Reduction in the SLR and CRR: The committee recommended the reduction of the higher proporon of the statutory fiquidity ratio “SE R’ and the cash reserve rau ‘CRR’, Both of these muos were, very high at that ume. The SER then was 3S § per cent and CRR was 16‘per cent. This high amount, of SLR and CRR meant locking the bank resources for government uses. As i was a hindranee in, the productivity of the hank. the committee recommended their gradual reducuion ‘SLR was recom, , pmended to reduce from 48.5 per cent to 25 per cent and CRR from 15 per cent to 3-5 per cent), , * ‘ Phusing out directed credit programme: In India, since nahonalization, directed credit’programmes were adopted by the government The committee recommended phasing oul of this pronoe This programme compelied banks to earmark the financial resources tor the needy and, poor scftors at contessional rales of interest. It was reducing the profitability of banks and ae the, coramittee recommended the stopping of this programme, , , , . ( interest rate determination; The committee felt that the interest rates in India are regulated and, Controlled by the authoribes. The determination of the tatgrest rate should be on the grounds of, market forces such as the demand for and the supply of fund Hence, the committee recommended, , eliminating gos ern ent contruls on interest rate and phasing out the concessional interest nites tor, es 3, the priority sector :, , « (Structural reorganizations of the banking sector: The committee recommended that the actual, i, , numbers of public sector banks need to be reduced. Tiree to four big banks inchiding SBI should ., q . x f & 7 ;, be devcloped as international banky Eight to ten banks having nationwide pe 8 cull cle, a 2 presence should car, , centrate on the national and universal banking servic, wanking services. Local banks shot, c ’ . uld conce es, specific banking Regarding the RRBs (regional rural banks), it retieuead oe = “, : “nde at they shou, , Scanned by CamScanner 4

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FIKANCTAL SYSTEM 4), , ig. They recommended that the government should asuire, , focus on agnicolture and rural financin, mtonalization and that private and foreign banks should be, , that henceforth there would not be any 1, , allowed liberal entry in India,, -(_ Establishment of the ARF tribunal: The proportian of bad debts and non-performing asset, , (NPA) of the public sector Banks and Development Financial Institule was very alarming in those, days. The committee recommended the establishment of an asset reconstruction fund (ARFS\This, fund would take over the proportion of the bad and doubtful debts from the banks and ral, insututions. It would help banks get rid of bad debts., , committee recommended the stepping of this system) It conside:, gn red and rec, should be the only main agency to regulate banking tn India — eet, + [Banking autonomy: The committee recommended that the Public sector banks should be tree and, honomous. In order to pursue competitiveness and efficiency, banks must enjoy aut that, they can reform the work culture and banking technology upgradation will thus ra aa =, , Some of these recommendations were later accepted by, ing reforms. ¢pted by the Government of India and became bank

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=A sca, Some of these recommendations were later accepted by the Government of India and became banking reforms., , , , 1.12.4 (Narasimham Committee Report II—1998 >, , In 1998, the government appointed another committee under the chairmanship of Mr Narsimham. It is, jer known as the Banking Sector Committee) t was told to review the banking reform progress and, design a programme for further strengthening the financial system of India. The committee focused on, sanous areas such as capital adequacy, bank mergers, bank legislation and so on., (u submitted ils report to the government in April 1998 with the following recommendations: 3, , r (Strengthening banks in India: The committee considered the stronger banking system in the context, of the current account cony enubility ‘CAC’. It thought that Indian banks must be capable of handling, problems regarding domestic liquidity nd exchange rate management in the light of CAC Thus,, it recommended the merger of strong banks which would have a ‘multiplier effect’ on the industry., , - (Narrow banking: In those days, many public sector banks were facing a problem of the nofperforming assets (NPAs), Some of them had NPAs as high as 20 per cent of their assets Thus, (or, successful rehabilitation of these banks 1 recommended a ‘narrow banking concep. where weak, anks would be allowed to place their funds only in short-term and cisk-free 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 presenbed capital adequacy norms, This would further Wnprove their absorption capacity also. Currently, the capital adequacy rato for, , fon banks 1s at 9 per cent, , * ( Bank ownership: As it had earlier mentioned the freedom for banks in tts working and bank autonomy, it felt that the gosernmicnt contol over the banks inthe form of management and ownership, and bank autonomy did not go hand in hand and thus 1 oe 4 ceview of functions of, , pee and enabled them to adupt a professional corporate strategy, * (Review of banking laws: [he conunitice considered that there was an urgent need for reviewing, , and amending main laws governing the Indian Banking Industry such as the RBI Act, Banking, Regulation Act, State Bank of India Act, Bank Nationalisation Act und so on) This upgradation, , would bring them in line with the present needs of the banking sector in India., , Scanned by CamScanner, , , , ea alata. jnndias “pare