SUBMITTED TO: SUBMITTED BY: MAM TANYA SHARMA

• 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

• Set up to analyze all factors related to financial system and give 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

• Narasimham Committee I was a nine-member

committee set up by the Government of India on

14 August 1991

• It was set up to examine all aspects relating to the

structure, organisation, functions and procedures

of the financial system

• The Committee submitted its report to the

Government on November 16, 1991

• The report was tabled in the Parliament on

December 17, 1991

• Reduction in CRR and SLR

• Phasing out Directed Credit Programmes

• Interest Rate Deregulation

• Structural Reorganization of Banks

• Change in the Control Structure of Banks

• Establishment of ARF tribunal

• Change in Classification of Assets

• Allowing Banks to raise Capital

• Liberalization of Capital Markets

OTHER SUGGESSTIONS

Adoption of uniform accounting practises

Income recognition

Provisioning

Transparency

Computerisation

Development of financial institutions

• One of the most important recommendations made by the

committee was a drastic reduction in CRR and SLR

• Committee noted that the high amount of CRR and SLR

was hindering the productivity of Banks considerably

• SLR was recommended to reduce from 38.5 % to 25%

and CRR was recommended to be reduced to 15% to a

range of 3-5% by 1996-97

• The committee acknowledged the role of these programs

in extending the reach of Banking system to the neglected

sectors of the economy.

• However, it also called for re-examination of the present

relevance of these programs, especially for those sectors

which had become self-sufficient.

• Accordingly, the committee proposed that the directed

credit committees should be phased out.

• It also called for a re-defining of the priority sector.

• The Committee observed that the prevailing structure of

administered rates was highly complex and rigid and

called for deregulating it so that it reflects the emerging

market conditions

• However, it warned against instant deregulation and

suggested that the rates be brought in line with the

market rates gradually over a period of time

• The Committee also recommended phasing out

Concessional Interest rates

In regard to the structure of the Banking System, The

Committee believed that the structure should consist of:

• 3-4 Banks (Including SBI) becoming International Banks

• 8 to 10 national banks with a network of branches

throughout the country engaged in 'universal' banking

• Local banks whose operations would be generally confined

to a specific region

• Rural banks (including RRBs) whose operations would be

confined to the rural areas and whose business would be

predominantly engaged in financing of agriculture and

allied activities

• The move towards this revised system should be market driven and based on profitability considerations and brought about through a process of mergers and acquisitions

• The Committee also called on the Government to stop further nationalization of Banks

• It also proposed that there be no bar to start new banks in the private sector being set up provided they conform to the start-up capital and other requirements

• It also called for liberalizing the process of foreign banks entering the country

• The committee recommended that RBI should be the sole authority in-charge of controlling the Banks

• It also called for greater autonomy to be given to Public sector banks.

• The Committee believed that the internal organization should be the prerogative of the management of the Individual Banks

BRANCH LICENSING

• Opening and closing of branches other than rural should be left to judgement of individual banks.

• For the medium and large national banks the Committee proposed a three-tier structure in terms of head office, a Zonal office and branches

• For very large banks, a four tier-structure was proposed, with the addition of a regional office along with the three mentioned above

• Those days, the proportion of bad debts and non-performing assets of the public sector banks and Development financial institutes was very high.

• The committee recommended the establishment of an Asset Reconstruction Fund (ARF)

• The suggestion was that the ARF would take over the proportion of the bad and doubtful debts from the banks and financial institutes.

• All bad and doubtful debts of the banks were to be transferred in a phased manner to ensure smooth and effective functioning of the ARF

• The committed also suggested the formation of special tribunals to recover loans granted by the bank

Adoption of uniform

accounting practises

Income recognition

Provisioning

ADOPTION OF UNIFORM ACOUNTING

PRACTISES

Banks and financial institutions should adopt uniform accounting practises . This

particularly requires income recognition and provisioning against doubtful debts.

• The Committee recommended that the assets of bank should be classified into 4 categories: (a) standard (b) sub-standard (c) doubtful, and (d) loss assets

• It also called for full and transparent disclosures to be made in the Balance Sheet as recommended by the International Accounting Standards Committee. Provision of 10 per cent in case of sub standard asset and 100 per cent of security shortfall in case of doubtful debts. In case of secured debts in doubtful category a further provision of 20 to 50 per cent should be created.

INCOME RECOGNITION:

•In banks and financial institutions , which follow accrual

system of accounting should not recognise any income in

respect of non performing assets.

•Asset would be considered NPA , if interest on asset is due

for a period exceeding 180 days on balance sheet date .

• The Committee recommended that profitable banks and

banks with good reputation should be permitted to raise

capital from the public through the capital market

• Regarding other banks, the government should subscribe

to their capital or give a loan, which should be treated as

a subordinate debt, to meet their capital requirements

• The Committee suggested that there should be no need

to obtain any prior permission to issue capital

• It also called for the office of the “Controller of capital

issues” to be abolished

• The Committee also recommended that the Capital

markets should be opened for Foreign Portfolio

Investments

Computerisation:It favoured Rangrajan committee on computerisation .

Computers are indispensable tools of customer service.

Transparency:Final accounts of banks should be made transparent . Full

disclosure be made as per International Accounting Standards

Committee norms. This may be done after implementing

income recognisation and provisioning norms.

Development financial institutions (DFI):• Should be granted operational flexibility , measure of

competition.

• System of syndication or participation in lending should be

evolved.

• Cross equity holding amongst DFI should be done away with.

• Regulatory framework should be made for new institutions

like merchant banks, mutual funds etc.

INTREST RATE DEREGULATION:Interest rate on deposits and loans almost completely

deregulated in April 1998. All advances from RBI are now

linked to bank rate. Lending rate is linked to Prime Lending

Rate.

REDUCTION OF CRR AND SLR:CRR has been bought down to 10 per cent and SLR to 25 per

cent .

DIRECTED CREDIT:Number of directed credit categories and interest rate subsidy

element has been reduced . Weaker section under priority

sector have been redefined.

BRANCH LISCENSING:It has been liberalised . Domestic banks satisfy capital

adequacy requirement are free to start branches.

• PRIVATE AND FOREIGN BANKS:Setting up of new private sector banks and entry of foreign

banks have been allowed.

• BANK’S ACCESS TO CAPITAL MARKET:Nationalised banks have been permitted to raise capital from

the public upto 49 % .

• SUPERVISION:Board of Financial Supervision has been set up. BFS

supervises financial institutions , NBFC’s in addition to banks.

• CUSTOMER SERVICE:Banking Ombudsman scheme 1995 was introduced for speedy

settlement of disputes.

MERGER OF BANKS:

New Bank of India was merged with Punjab National Bank in

1993. Some other Banks proposals are pending .

RECOVERY OF TRIBUNALS:

Special Debt Recovery Tribunal has been set up.

COMPUTERISATION:An agreement for computerisation was signed with trade

unions. Banks computerisation is taking place at a fast pace.

PRUDENTIAL ACCOUNTING STANDARDS:Prudential accounting norms regarding income recognition ,

asset classification and provisioning have been implemented

in a phased manner and is being further strengthened.

• Recommendations were far-fetched and far-ahead of their times

• Recommendations were well received, leading to successful implementation of most of its recommendations

• During the 2008 economic crisis, performance of Indian banking sector was far better than their international counterparts

• This was credited to the successful implementation of the recommendations of the Narasimham Committee-II with particular reference to the capital adequacy norms and the recapitalization of the public sector banks

• Impact of the two committees has been so significant that the financial-economic sector professionals have been applauding there positive contribution

• Setup by the Finance Ministry of the Government of India

under the chairmanship of Mr M. Narasimham in 1998.

• Committee submitted the report in April 1998

• Aim was to review the progress of the implementation of

the banking reforms since 1992 with the aim of further

strengthening the financial institutions of India

• Report focused on issues like size of banks and capital

adequacy ratio

Need for a Stronger Banking System:

• The Narasimham Committee has made out a strong case for a stronger banking system in the country

• Recommended the merger of strong banks which will have a “multiplier effect” on industry

• Recommended the use of mergers to build the size and strength of operations for each bank

• Committee has also supported that two or three large strong banks be given international or global character

• Many public sector banks were facing a problem of the

Non-performing assets (NPAs)

• Some of them had NPAs were as high as 20 percent of

their assets

• For successful rehabilitation of these banks, the

committee recommended 'Narrow Banking Concept'

• Weak banks will be allowed to place their funds only in

short term and risk free assets.

• To improve the inherent strength of the Indian banking

system the committee recommended that the Government

should raise the prescribed capital adequacy norms

• This would improve their Risk absorption capacity

• The committee targeted raising the capital adequacy ratio

to 9% by 2000 and 10% by 2002

• Recommended penal provisions for banks that fail to meet

these requirements

• Greater autonomy was proposed for the public sector banks in order for them to function with equivalent professionalism as their international counterparts

• Committee recommended GOI equity in nationalized banks be reduced to 33% for increased autonomy

• RBI should relinquish its seats on the board of directors of these banks

• Committee recommended a review of functions of banks boards with a view to make them responsible for enhancing shareholder value through formulation of corporate strategy and reduction of government equity

• Committee considered that there was an urgent need for

reviewing and amending main laws governing Indian

Banking Industry

• RBI Act, Banking Regulation Act, State Bank of India Act,

Bank Nationalization Act, etc.

• This upgradation will bring them in line with the present

needs of the banking sector in India

• Narasimham Committee-II also highlighted the need for

'zero' non-performing assets for all Indian banks with

International presence

• Committee recommended creation of Asset

Reconstruction Funds or Asset Reconstruction

Companies to take over the bad debts of banks, allowing

them to start on a clean-slate

• Committee recommended a proper system to identify and

classify NPAs and for an independent loan review

mechanism for improved management of loan portfolio

• To implement these recommendations, the RBI in Oct

1998, initiated the second phase of financial sector

reforms on the lines of Narasimham Committee-II report

• RBI raised Capital Adequacy Ratio by 1%

• Tightened the prudential norms for provisioning and

asset classification in a phased manner

• RBI targeted to bring the capital adequacy ratio to 9% by

March 2001

Implementation:

• The mid-term Review of the Monetary and Credit Policy of

RBI announced another series of reforms, in line with the

recommendations with the Committee, in October 1999

• Criteria for “autonomous status” was identified by March

1999 and 17 banks were considered eligible for autonomy

• Committee's recommendations let to introduction of a new

legislation in 2002, Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest

Act, 2002

• But some recommendations like reduction in Government's

equity to 33%, the issue of greater professionalism and

independence of the board of directors of public sector

banks is still awaiting Government follow-through and

implementation

• “Banking” – by N. T. Somashekar

• www.rbi.org.in

• www.nabard.org/fileupload/DataBank/Newsletters/March

1992.pdf

• http://www.expressindia.com/fe/daily/19971230/3645526

3.html

• Course book – Banking and Insurance B. Com 2 P.U.

Chd.