Narasimham Commission Study 1991 1998

Problems Identified By The Narasimham Committee

Directed Investment Programme : The commission objected to the scheme of maintaining high liquid assets past times commercial banks inwards the shape of cash, gilt too unencumbered regime securities. It is likewise known every bit the statutory liquidity Ratio (SLR). In those days, inwards India, the SLR was every bit high every bit 38.5 percent. According to the M. Narasimham's Committee it was i of the reasons for the pathetic profitability of banks. Similarly, the Cash Reserve Ratio- (CRR) was every bit high every bit xv percent. Taken together, banks needed to keep 53.5 percentage of their resources idle alongside the RBI.
Directed Credit Programme : Since nationalization the regime has encouraged the lending to agriculture too small-scale industries at a confessional charge per unit of measurement of interest. It is known every bit the directed credit programme. The commission opined that these sectors receive got matured too thus produce non ask such fiscal support. This directed credit programme was successful from the government's quest of stance but it affected commercial banks inwards a bad manner. Basically it deteriorated the character of loan, resulted inwards a shift from the safety oriented loan to purpose oriented. Banks were given a huge target of priority sector lending, etc. ultimately leading to net turn a profit erosion of banks.
Interest Rate Structure : The commission found that the involvement charge per unit of measurement construction too charge per unit of measurement of involvement inwards Republic of Republic of India are highly regulated too controlled past times the government. They likewise found that regime used banking concern funds at a inexpensive charge per unit of measurement nether the SLR. At the same fourth dimension the regime advocated the philosophy of subsidized lending to certainly sectors. The commission felt that in that location was no ask for involvement subsidy. It made banks handicapped inwards damage of edifice principal strength too expanding credit supply.
Additional Suggestions : Committee likewise suggested that the decision of involvement charge per unit of measurement should live on on grounds of marketplace forces. It farther suggested minimizing the slabs of interest.

Along alongside these major work areas M. Narasimham's Committee likewise found diverse inconsistencies regarding the banking scheme inwards India. In club to take them too larn far to a greater extent than vibrant too efficient, it has given the next recommendations.

Narasimham Committee Report I - 1991

The Narsimham Committee was prepare inwards club to study the problems of the Indian fiscal scheme too to advise simply about recommendations for improvement inwards the efficiency too productivity of the fiscal institution.

The commission has given the next major recommendations:-

Reduction inwards the SLR too CRR : The commission recommended the reduction of the higher proportion of the Statutory Liquidity Ratio 'SLR' too the Cash Reserve Ratio 'CRR'. Both of these ratios were rattling high at that time. The SLR too so was 38.5% too CRR was 15%. This high total of SLR too CRR meant locking the banking concern resources for regime uses. It was hindrance inwards the productivity of the banking concern thus the commission recommended their gradual reduction. SLR was recommended to bring down from 38.5% to 25% too CRR from 15% to iii to 5%.
Phasing out Directed Credit Programme : In India, since nationalization, directed credit programmes were adopted past times the government. The commission recommended phasing out of this programme. This programme compelled banks to earmark too so fiscal resources for the needy too pathetic sectors at confessional rates of interest. It was reducing the profitability of banks too thus the commission recommended the stopping of this programme.
Interest Rate Determination : The commission felt that the involvement rates inwards Republic of Republic of India are regulated too controlled past times the authorities. The decision of the involvement charge per unit of measurement should live on on the grounds of marketplace forces such every bit the demand for too the provide of fund. Hence the commission recommended eliminating regime controls on involvement charge per unit of measurement too phasing out the concessional involvement rates for the priority sector.
Structural Reorganizations of the Banking sector : The commission recommended that the actual numbers of populace sector banks ask to live on reduced. Three to 4 big banks including SBI should live on developed every bit international banks. Eight to Ten Banks having nationwide presence should concentrate on the national too universal banking services. Local banks should concentrate on part specific banking. Regarding the RRBs (Regional Rural Banks), it recommended that they should focus on agriculture too rural financing. They recommended that the regime should assure that henceforth in that location won't live on whatsoever nationalization too somebody too unusual banks should live on allowed liberal entry inwards India.
Establishment of the ARF Tribunal : The proportion of bad debts too Non-performing property (NPA) of the populace sector Banks too Development Financial Institute was rattling alarming inwards those days. The commission recommended the establishment of an Asset Reconstruction Fund (ARF). This fund volition pick out over the proportion of the bad too doubtful debts from the banks too fiscal institutes. It would assistance banks to larn rid of bad debts.
Removal of Dual control : Those days banks were nether the dual command of the Reserve Bank of Republic of Republic of India (RBI) too the Banking Division of the Ministry of Finance (Government of India). The commission recommended the stepping of this system. It considered too recommended that the RBI should live on the entirely principal way to regulate banking inwards India.
Banking Autonomy : The commission recommended that the populace sector banks should live on complimentary too autonomous. In club to pursue competitiveness too efficiency, banks must relish autonomy so that they tin flaming reform the piece of work civilization too banking technology scientific discipline upgradation volition thus live on easy.

Some of these recommendations were subsequently accepted past times the Government of Republic of Republic of India too became banking reforms.

Narasimham Committee Report II - 1998

In 1998 the regime appointed withal simply about other commission nether the chairmanship of Mr. Narsimham. It is amend known every bit the Banking Sector Committee. It was told to review the banking reform progress too blueprint a programme for farther strengthening the fiscal scheme of India. The commission focused on diverse areas such every bit working capital alphabetic character adequacy, banking concern mergers, banking concern legislation, etc.

It submitted its study to the Government inwards Apr 1998 alongside the next recommendations.

Strengthening Banks inwards India : The commission considered the stronger banking scheme inwards the context of the Current Account Convertibility 'CAC'. It idea that Indian banks must live on capable of treatment problems regarding domestic liquidity too central charge per unit of measurement administration inwards the low-cal of CAC. Thus, it recommended the merger of rigid banks which volition receive got 'multiplier effect' on the industry.
Narrow Banking : Those days many populace sector banks were facing a work of the Non-performing assets (NPAs). Some of them had NPAs were every bit high every bit xx percentage of their assets. Thus for successful rehabilitation of these banks it recommended 'Narrow Banking Concept' where weak banks volition live on allowed to house their funds entirely inwards curt term too gamble complimentary assets.
Capital Adequacy Ratio : In club to improve the inherent strength of the Indian banking scheme the commission recommended that the Government should enhance the prescribed working capital alphabetic character adequacy norms. This volition farther improve their absorption capacity also. Currently the working capital alphabetic character adequacy ration for Indian banks is at ix percent.
Bank ownership : As it had before mentioned the liberty for banks inwards its working too banking concern autonomy, it felt that the regime command over the banks inwards the shape of administration too ownership too banking concern autonomy does non larn manus inwards manus too thus it recommended a review of functions of boards too enabled them to adopt professional person corporate strategy.
Review of banking laws : The commission considered that in that location was an urgent ask for reviewing too amending principal laws governing Indian Banking Industry similar RBI Act, Banking Regulation Act, State Bank of Republic of Republic of India Act, Bank Nationalisation Act, etc. This upgradation volition convey them inwards work alongside the introduce needs of the banking sector inwards India.

Apart from these major recommendations, the commission has likewise recommended faster computerization, technology scientific discipline upgradation, grooming of staff, depoliticizing of banks, professionalism inwards banking, reviewing banking concern recruitment, etc.

Evaluation of Narsimham Committee Reports

The Committee was outset prepare inwards 1991 nether the chairmanship of Mr. M. Narasimham who was 13th governor of RBI. Only a few of its recommendations became banking reforms of Republic of Republic of India too others were non at all considered. Because of this a minute commission was in i lawsuit to a greater extent than prepare inwards 1998.

As far every bit recommendations regarding banking concern restructuring, administration freedom, strengthening the rule are concerned, the RBI has to play a major role. If the major recommendations of this commission are accepted, it volition examine to live on fruitful inwards making Indian banks to a greater extent than profitable too efficient.