Narasimham Committee
From the
Two such expert Committees were set up under the chairmanship of
Unlike the
Background
During the decades of the 60s and the 70s, India
Given the rigidities and weaknesses had made serious inroads into the Indian banking system by the late 1980s, the Government of India, post-crisis, took several steps to remodel the country's financial system.[3] The banking sector, handling 80% of the flow of money in the economy, needed serious reforms to make it internationally reputable, accelerate the pace of reforms and develop it into a constructive usher of an efficient, vibrant and competitive economy by adequately supporting the country's financial needs.[4]
In the light of these requirements, two expert Committees were set up in 1990s under the chairmanship of M. Narasimham, former Reserve Bank of India governor which are widely credited for spearheading the financial sector reform in India.[3]
The first Narasimhan Committee (Committee on the Financial System – CFS) was appointed by
The purpose of the Narasimham-I Committee was to study all aspects relating to the structure, organisation, functions and procedures of the financial systems and to recommend improvements in their efficiency and productivity. The Committee submitted its report to the Finance Minister in November 1991 which was tabled in Parliament on 17 December 1991.[6]
The Narasimham-II Committee was tasked with the progress review of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India.[4] It focussed on issues like size of banks and capital adequacy ratio among other things.[9] M. Narasimham, chairman, submitted the report of the Committee on Banking Sector Reforms (Committee-II) to the Finance Minister Yashwant Sinha in April 1998.[4][9]
Recommendations of the Committee
The 1998 report of the committee to the GOI made the following major recommendations:
Autonomy in Banking
Greater autonomy was proposed for the
To implement this, criteria for autonomous status were identified by March 1999 (among other implementation measures) and 17 banks were considered eligible for autonomy.[12] But some recommendations like reduction in Government's equity to 33%,[13][14] the issue of greater professionalism and independence of the board of directors of public sector banks is still awaiting Government follow-through and implementation.[15]
Reform in the role of RBI
First, the committee recommended that the RBI withdraw from the 91-day treasury bills market and that interbank call money and term money markets be restricted to banks and primary dealers.[6][12] Second, the Committee proposed a segregation of the roles of RBI as a regulator of banks and owner of bank.[16] It observed that "The Reserve Bank as a regulator of the monetary system should not be the owner of a bank in view of a possible conflict of interest". As such, it highlighted that RBI's role of effective supervision was not adequate and wanted it to divest its holdings in banks and financial institutions.
Pursuant to the recommendations, the RBI introduced a
Stronger banking system
The Committee recommended for merger of large Indian banks to make them strong enough for supporting international trade.
There were a string of mergers in banks of India during the late 90s and early 2000s, encouraged strongly by the Government of India in line with the committee's recommendations.[21] However, the recommended degree of consolidation is still awaiting sufficient government impetus.[15]
Non-performing assets
Non-performing assets had been the single largest cause of irritation of the banking sector of India.[4] Earlier the Narasimham Committee-I had broadly concluded that the main reason for the reduced profitability of the commercial banks in India was the priority sector lending. The committee had highlighted that 'priority sector lending' was leading to the buildup of non-performing assets of the banks and thus it recommended it to be phased out.[10] Subsequently, the Narasimham Committee-II also highlighted the need for 'zero' non-performing assets for all Indian banks with International presence.[10] The 1998 report further blamed poor credit decisions, behest-lending and cyclical economic factors among other reasons for the buildup of the non-performing assets of these banks to uncomfortably high levels. The 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.[4][22][23] The option of re-capitalization through budgetary provisions was ruled out. Overall the committee wanted a proper system to identify and classify NPAs,[6] NPAs to be brought down to 3% by 2002[4] and for an independent loan review mechanism for improved management of loan portfolios.[6] The committee's recommendations led to introduction of a new legislation which was subsequently implemented as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and came into force with effect from 21 June 2002.[24][25][26]
Capital adequacy and tightening of provisioning norms
To improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribed capital adequacy norms.[9] This would also improve their risk taking ability.[11] The committee targeted raising the capital adequacy ratio to 9% by 2000 and 10% by 2002 and have penal provisions for banks that fail to meet these requirements.[4][6] For asset classification, the Committee recommended a mandatory 1% in case of standard assets and for the accrual of interest income to be done every 90 days instead of 180 days.[12]
To implement these recommendations, the RBI in Oct 1998, initiated the second phase of financial sector reforms by raising the banks' capital adequacy ratio by 1% and tightening the prudential norms for provisioning and asset classification in a phased manner on the lines of the Narasimham Committee-II report.[27] The RBI targeted to bring the capital adequacy ratio to 9% by March 2001.[28] 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.[12]
Entry of foreign banks
The committee suggested that the foreign banks seeking to set up business in India should have a minimum start-up capital of $25 million as against the existing requirement of $10 million. It said that foreign banks can be allowed to set up subsidiaries and joint ventures that should be treated on a par with private banks.[4]
Implementation of recommendations
In 1998, RBI Governor Bimal Jalan informed the banks that the RBI had a three to four-year perspective on the implementation of the committee's recommendations.[27] Based on the other recommendations of the committee, the concept of a universal bank was discussed by the RBI and finally ICICI bank became the first universal bank of India.[17][29][30] The RBI published an "Actions Taken on the Recommendations" report on 31 October 2001 on its own website. Most of the recommendations of the Committee have been acted upon (as discussed above) although some major recommendations are still awaiting action from the Government of India.[31]
Criticism
There were protests by employee unions of banks in India against the report. The Union of RBI employees made a strong protest against the Narasimham II Report.
Reception
Initially, the recommendations were well received in all quarters, including the
References
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- ^ "INDIA'S ECONOMIC REFORMS: AN APPRAISAL". Montek Singh Ahluwalia. 26 August 1999.