Financial Sectors Reforms Committee 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

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
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
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, TheCommittee 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 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
The Committee recommended that the assets of bank should be classified into 4 categories: (a) standard (b) substandard (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
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
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

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 up gradation 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

Implementation: 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

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 Committees 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 Governments 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

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