Narasimham Committee

~ BANKING LAW PRESENTATION ON ~
NARASIMHAM COMMITTEE
By,
Shristi Das, Roll No. 1683085
Sobha Sagnika Panda, Roll No.
1683090
CONTENTS :
 Introduction
 Rationale behind the Committee
 Problems identified by the Committee
 Narasimham Committee Report I
 Narasimham Committee Report II
 Implementation
 Impact & Conclusion
2
• The First Narasimham Committee (Committee on the Financial System – CFS) was
appointed by Dr. Manmohan Singh as India's Finance Minister on 14 August 1991,
against the backdrop of the Balance of Payment Crisis in India.
• A nine member committee was set up under the chairmanship of
Maidavolu Narasimham, the 13th Governor of the RBI,
to study all aspects relating to the structure, organization, functions
and procedures of the financial systems and to recommend
improvements in their efficiency and productivity.
• The Second Narasimham Committee (Committee on Banking Sector Reforms) was

appointed by P. Chidambaram as the Finance Minister in December, with the aim of
further strengthening the financial institutions of India. It focused on issues like size of
banks and capital adequacy ratio among other things.
3
• During the decades of the 60s and the 70s, India nationalized most of its banks,
which culminated with the balance of payment crisis of the Indian economy where
India had to airlift gold to International Monetary Fund (IMF) to loan money to meet
its financial obligations.
• This event called into question the previous banking policies of India and triggered
the era of economic liberalization in 1991.
• 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.
In the light of these requirements, the two expert Committees were set up in 1990s
under the Chairmanship of Mr. M. Narsimham.
4
PROBLEMS IDENTIFIED BY THE COMMITTEE
• Higher rates of CRR(15%) and SLR(38.5%)

• Directed credit programs
• Political and Administrative interference
• Subsidizing of credit
• Mounting expenditures of banks
5
Narasimham Committee
Report I - 1991
“
• 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, organization, 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.
7
KEY SUGGESTIONS
• 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
• Removal of Dual control
• Banking Autonomy
8
• Reduction in the SLR and CRR : The committee recommended the reduction of
the higher proportion of the Statutory Liquidity Ratio 'SLR' and the Cash Reserve
Ratio 'CRR'. Both of these ratios were very high at that time.
• Phasing out Directed Credit Programme : In India, since nationalization, directed
credit programs were adopted by the government. The committee recommended
phasing out of this programme.
• Interest rate determination : The committee felt that the interest rates in India are
regulated and controlled by the authorities. The Committee observed that the
prevailing structure of administered rates was highly complex and rigid and called
for deregulating.
• Structural Reorganizations of the Banking sector : The committee recommended
that the actual numbers of public sector banks need to be reduced. Three to four
big banks including SBI should be developed as international banks.
9
• Control of banks: 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.
• Establishment of the ARF Tribunal : The proportion of bad debts and Non-
performing asset (NPA) of the public sector Banks and Development Financial
Institute was very alarming in those days.
• Removal of Dual control : Those days banks were under the dual control of the
Reserve Bank of India (RBI) and the Banking Division of the Ministry of Finance
• Banking Autonomy : The committee recommended that the public sector banks
should be free and autonomous. In order to pursue competitiveness and
efficiency, banks must enjoy autonomy so that they can reform the work culture
and banking technology upgradation will thus be easy.
10
Narasimham Committee
Report II - 1998
“
• In 1998 the government appointed yet another
committee under the chairmanship of Mr.
Narsimham, which came to be known as the Banking
Sector Committee.
• It was told to review the banking reform progress and
design a programme for further strengthening the
financial system of India.
• The committee focused on various areas such as
capital adequacy, bank mergers, bank legislation, etc.
12
• Strengthening Banks in India : The committee considered the stronger banking
system in the context of the Current Account Convertibility (CAC).
• Narrow Banking : Those days many public sector banks were facing a problem of the
Non performing assets (NPAs).Some of them had NPAs as high as 20 percent of
their 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
prescribed capital adequacy norms.
• Bank ownership : As it had earlier mentioned the freedom for banks in its working
and bank autonomy, it felt that the government control over the banks banks in the
form of management and ownership and bank autonomy does not go hand in hand
and thus it recommended a review of functions of boards and enabled them to adopt
professional corporate strategy.
13
• Review of banking laws : The committee considered that there was an urgent need
for reviewing and amending main laws governing Indian Banking Industry like 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.
Other recommendations included:

• Need for computerization process in public sector banks
• Higher capital adequacy requirements for banks
• Setting up of small local banks which would be confined to states or cluster of
districts in order to serve local trade, small industry, and agriculture
14
IMPLEMENTATION
• 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
• 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, Securitization and Reconstruction of Financial Assets and 15
Enforcement of Security Interest Act, 2002.
IMPACT & CONCLUSION
• Although the recommendations were far-fetched and far-ahead of their times, they
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.
16
~ THANK YOU ~
17

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~ BANKING LAW PRESENTATION ON ~

• The Second Narasimham Committee (Committee on Banking Sector Reforms) was

• Higher rates of CRR(15%) and SLR(38.5%)

• Reduction in CRR and SLR

Other recommendations included:

• RBI raised Capital Adequacy Ratio by 1%

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