Narasimhan Committee Banking Reforms YouTube Lecture Handouts

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Narasimhan Committee Banking Reforms 1991 & 1998: Father of Banking Reforms - M. Narasimhan

Title: Narasimhan Committee Banking Reforms

Narasimham also founded the credit planning cell in RBI, which became the monetary policy department ‘Father of banking reforms’ : Ex-RBI governor M Narasimham

Banking Reforms 1991

  • 4 tier hierarchy system with 3 - 4 banks at top; 8 to 10 national banks and then local banks and RRBs
  • Private bank at par with public banks
  • Lift ban to set new private banks and abolish license for expansion of bank branches
  • More liberal for foreign banks; joint venture of Indian and Foreign banks
  • Ensuring higher degree of operational flexibility;
  • Autonomy in decision making; and
  • To infuse competitiveness and higher degree of professionalism in banking operations in order to achieve efficiency and effectiveness of the financial system.
  • The committee introduced the concept of capital adequacy ratio
  • The concepts of non-performing assets classification and full disclosure of accounts were also recommended by the first committee.
  • Reduce SLR and CRR from 1991 - 92 rates
  • Deregulate interest rate to reflect emerging markets
  • Curtail priority lending and redefine priority sector to comprise of small and marginal farmers, tiny industrial sector, small business operators and other weaker section
  • Disinvest part of public sector banks like PSUs
  • Every public sector bank should set up one or more rural banking subsidiaries
  • Implications - Reduction of SLR may affect the borrowing capacity of government adversely

Narasimham Committee 2

  • Capital Adequacy: Committee suggested that there should be a 5 % weight for market risk for Govt. and approved securities
    • Non-Performing Assets (NPA) : Reduce to 5 % by the year 2000 and to 3 % by 2002
    • Prudential Norms: Reduce to 90 days by 2002
  • The committee is known as “Committee on Banking Sector Reforms” . The committee was set up to strengthen the financial institutions. The committee was tasked with progress review of banking reforms since 1992.

Non-Performing Assets (NPA)

  • The Committee recommended that an asset be classified as doubtful if it is in the substandard category for 18 months in the first instance and eventually for 12 months and loss if it has been so identified but not written off. These norms, which should be regarded as the minimum, may be brought into force in a phased manner.
  • The Committee recommended that the objective should be to reduce the average level of net NPAs for all banks to below 5 % by the year 2000 and to 3 % by 2002. For those banks with an international presence the minimum objective should be to reduce gross NPAs to 5 % and 3 % by the year 2000 and 2002, respectively, and net NPAs to 3 % and 0 % by these dates.
  • Hard core NPAs in most banks should be identified and their realisable value determined. These assets could be transferred to an Asset Reconstruction Company (ARC) which would issue to the banks NPA Swap Bonds.

Prudential Norms

  • In India, income stops accruing when interest or installment of principal is not paid within 180 days. The Committee recommended to reduce this limit to 90 days in a phased manner by the year 2002.
  • DFIs (Development Finance Institution) should over a period of time, convert themselves to banks
  • Facilitate Rural and Small Industrial Credits

Strengthening Banking System

  • Committee recommended that banks should bring out revised Operational Manuals and update them regularly, keeping in view the emerging needs and ensure adherence to the instructions so that these operations are conducted in the best interest of a bank and with a view to promoting good customer service.
  • Committee explained the need to institute an independent loan review mechanism especially for large borrowal accounts and systems to identify potential NPAs

Banking Structure

  • Committee recommended that DFIs (Development Finance Institution) should, over a period of time, convert themselves to banks. There would then be only two forms of intermediaries, viz. banking companies and non-banking finance companies.
  • If a DFI does not acquire a banking license within a stipulated time it would be categorized as a non-banking finance company. Mergers between banks and between banks and DFIs and NBFCs (Non-Banking Financial Companies) need to be based on synergies and locational and business

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