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Narasimhan Committee-II Recommendations

Narasimhan Committee-II Recommendations

The Narasimhan Committee on banking sector reforms submitted its report in April 1998 and made a series of sweeping recommendations. The report covers an entire gamut of issues ranging from bank mergers and the creation of globalised banks to bank closures, recasting bank boards and revamping banking legislations. The Committee makes a case for a stronger banking system in the country, especially, in the context of Capital Account Convertibility. Major recommendations of the Committee were as follows:

  1. Merger of strong banks which have a multiplier effect on industry. It cautioned against merger of strong banks with weak banks as this will adversely affect the asset quality of strong banks.
  2. Concept of narrow banking should be tried out to rehabilitate weak banks. If this was not successful, the issue of closure should be examined. Narrow banking, according to the Committee, implied that weak banks should not be permitted to invest their funds anywhere except in government securities as these were absolutely safe and risk free.
  3. Two or three large Indian banks should be given international character.
  4. Small, local banks should be confined to States or cluster of districts in order to serve local trade, small industry and agriculture.
  5. The Committee also commented on the Government’s role in public sector banks by observing that Government ownership has become an instrument of management. Such micro-management of banks is not conducive to enhancement of autonomy and flexibility.
  6. Functions of boards of management need to be reviewed so that the boards remain responsible for enhancing shareholder value through formulation of corporate strategy.
  7. Need to review minimum prescriptions for capital adequacy. In this regard, the Committee recommended that CAR be raised to 10 percent by 2002.
  8. The RBI Act, Bank Nationalisation Act, Banking Regulation Act and State Bank of India Act were in urgent need of review.
  9. Legal framework of loan recovery should be strengthened.
  10. Integration of NBFC’s lending activities into the financial system.
  11. Need for public sector banks to speed up computerisation and focus on relationship banking.
  12. Review of recruitment procedures, training and remuneration policies in public sector banks.
  13. Setting up of a Board for Financial Supervision for banks, financial institutions and NBFCs.
  14. Need for professionalising and depoliticising of bank boards.
  15. The Banking Service Recruitment Boards should be abolished.
  16. The RBI should act only as a regulator and not both regulator and owner.

The recommendations of the Committee continue to be implemented in a phased manner. For example, Capital Adequacy requirements of banks have been stepped up and prudential norms have been made more and more stringent. All the major banking legislations viz., the RBI Act (1934), the Banking Regulation Act (1949), Bank Nationalisation Act (1970) have been reviewed and gradually diluted in accordance with changing requirements. More flexibility is being provided to banks by greater autonomy to bank boards. On-line banking has become the key word and consolidation of the banking industry (rather than branch expansion) is being encouraged by permitting mergers and acquisitions within the existing legal framework. Asset Reconstruction Funds/Companies have been set up for bad debts and the FDI limit in private banks has been raised to 74 percent. Most importantly, a securitisation legislation has been put in place for recovery of bad debts. This is known as SARFAESI viz., Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests. In October, 2011, the Union Cabinet approved the introduction of a new bill in Parliament to amend SARFAESI (2002) and Recovery of Debts Due to Banks and Financial Institutions (1993) to enable banks to improve their operational efficiency, deploy more funds for credit disbursement to retail investors, home loan borrowers and corporates without worrying over the recovery process. Thus, the amendments would strengthen the ability of banks to recover dues from borrowers and reduce the level of their NPAs.

With liberalisation and growing integration of the Indian financial sector with the international market, the supervisory and regulatory role of RBI has become critical for the maintenance of financial stability. RBI has been continuously fine-tuning its regulatory and supervisory mechanism in recent years to match international standards.

The RBI has emphasised transparency, diversification of ownership and strong corporate governance practices to mitigate the prospects of systemic risks in the banking sector. The RBI has issued detailed draft guidelines on the sale/purchase of non-performing assets where securitisation companies and reconstruction companies are not involved.

Expansion of the banking sector is envisaged by issuing fresh banking licences to Private Sector players to achieve the goal of financial inclusion. The RBI issued guidelines for fresh banking licences which, inter alia, require a minimum capital of Rs. 500 crore and at least 25 percent of the branches to be set up in rural areas.

A Committee has been set up under the Chairmanship of former Governor of RBI Bimal Jalan to screen the applications received for fresh banking license and to make necessary recommendations in this regard.

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