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Narasimhan Committee 1991

Narasimhan Committee 1991

  • A High Level Committee with Mr. M.Narasimhan as the Chairman was set up by the Government of India on the financial system. The Committee submitted its report in November 1991. The Committee was primarily interested in the financial health of the public sector banks.
  • The important recommendations of the Narasimhan Committee 1991 were as follows:

On Directed Investment

  • Statutory Liquidity Requirements (SLR):
  • The Committee felt that SLR should not be used as a major instrument to mobilize funds for the government.
  • It recommended that SLR should be reduced from the present level of 28.5% o’ the net demand and time liabilities of banks to 25% over the next five years.
  • The government borrowings should be progressively marked oriented.
  • Cash Reserve Ratio (CRR):
  • The Committee proposed that the CRR should be progressively reduced from the present high level of 15% to 3 to 5%.
  • RB should also pay interest on impounded deposits of banks above the basic minimum at an interest rate equal to the level of banks’ one year deposits.

On Directed Credit Programmes:

  • The Committed proposed to phase out the directed credit programmes like the priority sector lending. It argued that after two decades of providing subsidized loan the rationale for directed credit as a regular programme does not exist. Such programme should be implemented on temporary basis only.
  • It also proposed that the priority sector lending should be limited for the weakest sections of the rural community only including the marginal farmers, rural artisans, village and cottage industries, tiny sector etc.
  • Accordingly, be reserved for the redefined priority sector. Further, even this system should be reviewed after every three years so as to assess the need for subsidized lending.

On the Interest Rate Structure:

  • The Committee recommended that the level of interest rate should be left to be determined by the market forces of demand for and supply of the loans. The concessional interest rates for the priority sector loans should be phased out.  Narasimhan Committee 1991
  • The Committee also proposed that the RBI should be sole authority to simplify the interest rate determination.
  • The Bank rate should be the benchmark rate and all other interest rates should be closely linked to it.

On the Banking Structure Reorganisation:

  • The Committee recommended that the number of public sector banks should be reduced through mergers and acquisitions and each bank should gain expertise in operating in a specific sector. The broad pattern of such structure was gives as follows:
  • 3 or 4 large banks which would become international in character.
  • 8 to 10 national banks with a network of branches throughout the country engaged in general or universal banking
  • Local banks whose operations would be confined to a specific region only.
  • Rural Banks including the Regional Rural Banks (RRBs) whose operations would be confined to the rural areas and whose business would be predominantly engaged in financing of agriculture and allied activities.
  • Since the nationalized banks already had a network of rural and semi-urban branches, the committee recommended to do away with the licensing process of the branches and proposed that banks should be given freedom to open branches according to their profitability considerations.
  • The Committee proposed that government should stop the process of nationalizing bank and should give opportunity to the private sector banks which confirm to the requirements. There should be no difference in the treatment between the public sector and private sector banks.
  • It also recommended that the foreign banks should be allowed to open offices in India either as branches or as subsidiaries. They should follow the same social obligation as being followed by the national banks.
  • Foreign banks and Indian Banks should be permitted to set up joint ventures in regard to merchant and investment banking, leasing and other new forms of financial services.  Narasimhan Committee 1991

Setting up Assets Reconstruction Fund (ARF):

  • In order to solve the problem of Non-performing Assets (NPAs) for banks and other financial institution, the committee recommended setting up of Asset Reconstruction Fund (ARF). ARF was supposed to take over a portion of bad and doubtful assets at a discount.
  • This was supposed to be done in a phased manner in order to smooth functioning of ARF. The ARF was supposed to recover these debts and the banks were supposed to have favourable balance sheets and funds to devote to more productive uses.

Bank Regulation:

  • The Committee recommended that the present system of dual control over the banking system of dual control over the Banking Division of the Ministry of Finance should be ended and RBI should be the sole bank regulatory body.    Narasimhan Committee 1991

Free and Autonomous Banks:

  • The Committee proposed that the appointment of the office bearers should not be made on the basis of political considerations, but should be made by an independent panel of experts.
  • Further, the banks should be free to achieve radical change in work technology and work culture.

Capital Adequacy Ratio (CAR):

  • The Committee proposed capital adequacy norms for banks which required banks to achieve a capital to risk weighted asset ratio of 8%. A bank’s real capital is assessed after taking into account the riskiness of assets.
  • Providing a cushion for riskiness of the asset is necessary to guarantee against insolvency and thus risk weighted asset valuation is needed.
  • The international norm for capital adequacy ratio was set up by Basel Committee on Banking Supervision under the aegis of the Bank of International Settlements (BIS) located in Basel, Switzerland.
  • The Basel Committee came up with the first set of recommendations which are called Basel I. These included a minimum capital adequacy of 8% of the total risk weighted assets of the bank.
  • It was later realized that Basel I norms addressed only financial risk. Accordingly, a second set of norms called Basel II was brought out in June 2004.

These norms are based on the three pillars of:

  • Capital Requirement
  • Supervisory Review and
  • Market Discipline

Since April 2009, the Indian banks have been following Basel II norms.

BASEL III ACCORD:

It is a comprehensive set of reform measures, to strengthen the regulation, supervision and risk management of the banking sector. These were formed in the backdrop of the financial meltdown of 2008, with additional parameters:

  • Setting aside of buffer capital by banks which can be drawn upon in the event of crisis.
  •  higher percentage to be kept by banks by way of Tier I capital(equity capital)
  •  Reduction of leverage by banks.

The Basel III capital ratios will be fully implemented as on March 2018.  Narasimhan Committee 1991

 

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