Before the opening up of the Indian Economy and

the advent of the banking sector reforms, the

Indian banking sector was plagued by the
following deficiencies:
1. Imposition of stringent regulations by the RBI
2. Low productivity and efficiency of Public
sector Banks.
3. Deteriorating portfolio quality, mounting bad
debts and increasing NPAs due to government
regulations, political interference and poor
monitoring.
4. Poor quality of customer service
5. Inferior work technology
6. Inability to face competition
It was on account of the deterioration in the financial health, integrity,
autonomy, flexibility and vibrancy in the financial sector that reforms
became imperative. In these circumstances that the first Narasimham
Committee was set up in 1991.
Narasimhan Committee I (1991)
This phase included the following:-
1. A phased reduction in SLR and CRR to 25% and 10% respectively
2. Deregulation of interest rates of deposits and advances of all co-
operative banks and banks allowed to set their own interest rates on
post-shipment export credit in rupees
3. Transparent guidelines for private sector banks. Modification of
balance sheet and Profit and loss account to disclose more
information.
4. Direct access to capital markets for public sector banks with profitable
operations
5. Setting up of debt recovery tribunals to ensure quick recovery of
debts.



6. Liberalized branch licensing policy wherein the option of
opening or closing branches, other than rural branches should
be left to the commercial judgment of individual banks and
more licenses for private sector banks.
7. No further nationalization for banks and no difference in
treatment between public sector banks and private sector
banks.
8. Prudential norms for income recognition, classification of
assets and provisioning for bad debts.
9. Asset reconstruction fund (ARF) should be created to take over
bad debts of banks on discount and leave a clean balance
sheet. The level of discount being determined by independent
auditors on the basis of clearly defined guidelines.
10. Limit of priority sector advances set at 40 %of total advances
11. Capital adequacy norms-BIS norms on capital adequacy should
be achieved and attain a capital adequacy ratio (CAR) of 8% by
1995.

In the initial phase of reforms, the focus of
reforms was on the scheduled commercial banks,
given their systematic importance. In the last
few years however the reform process has
become increasingly broad based encompassing
other institutions such as RRBs, Urban Co-
operative Banks, FIs and NBFCs.
After evaluation of the performance of the
banking sector after the introduction of reforms,
the second Narasimham committee gave its
report in 1998 and made further suggestions and
the following major recommendations:-
The banks should reduce the average level of net NPAs for
all banks to below 5%
An asset is classified as doubtful if it is in the substandard
category for 18 months in the first instance, the period
was subsequently reduced to 12 months in 2005
For banks with high NPA portfolio, all loan assets in the
doubtful and loss categories should be transferred to an
asset reconstruction company (ARC) and issue swap bonds
to the banks
Adoption of international practices by introduction of
norms of 90 days in a phased manner.
Greater attention to be paid to asset liability management
to avoid mismatch.
Banks should be encouraged to adopt statistical risk
management techniques.
Interest rates on deposits and advances of all co-operative
banks to be deregulated.
Prudential norms for income recognition,
classification of assets and provisioning for bad debts
for commercial banks, regional rural banks and
financial institutions
Banks were required to make their balance sheet
fully transparent and make full disclosures in keeping
with International Accounts Standards Committee.
Freedom to open, shift and swap branches as well as
to open extension counters given to banks.
Banking ombudsman scheme was introduced in 1995
to look into and resolve customers grievances.
The developmental financial institutions should
convert themselves to banks.
NPAs are those categories of assets (advances,
bills discounted, overdraft, cash credits etc)
which cease to generate income for the bank.
The basis for treating a credit facility as non-
performing is as follows:
1. Where the interest or instalments of a term
loan remains overdue for a period of more than
90 days.
2. Any bill which remains overdue for a period of
90 days
3. Any amount due on any other loan which
remains overdue for a period of 90 days.
4. Any cash credit/overdraft which remains out of
order for a period of 90 days.

Standard: Standard asset is one which does not
carry more than normal risk attached to the
business and which does not disclose any
problems.
Sub-standard: Sub-standard asset is one which
has been classified as NPA for a period not
exceeding 12 months.
Doubtful: A doubtful asset is one which has
remained NPA for a period exceeding 12 months
Loss Asset: A loss asset is one where loss has
been identified by the bank or internal or
external auditors or the RBI inspectors but the
amount has not been written off wholly or
partly.