Narasimham Commission Study 1991 1998 - Recommendations

Problems Identified By The Narasimham Committee

1. Directed Investment Programme : The commission objected to the scheme of maintaining high liquid assets yesteryear commercial banks inward the shape of cash, golden together with unencumbered authorities securities. It is besides known equally the statutory liquidity Ratio (SLR). In those days, inward India, the SLR was equally high equally 38.5 percent. According to the M. Narasimham's Committee it was ane of the reasons for the miserable profitability of banks. Similarly, the Cash Reserve Ratio- (CRR) was equally high equally xv percent. Taken together, banks needed to hold 53.5 pct of their resources idle alongside the RBI.
2. Directed Credit Programme : Since nationalization the authorities has encouraged the lending to agriculture together with small-scale industries at a confessional charge per unit of measurement of interest. It is known equally the directed credit programme. The commission opined that these sectors receive got matured together with thus create non ask such fiscal support. This directed credit programme was successful from the government's indicate of sentiment exactly it affected commercial banks inward a bad manner. Basically it deteriorated the lineament of loan, resulted inward 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 income erosion of banks.
3. Interest Rate Structure : The commission found that the involvement charge per unit of measurement construction together with charge per unit of measurement of involvement inward Republic of Republic of India are highly regulated together with controlled yesteryear the government. They besides found that authorities used banking concern funds at a inexpensive charge per unit of measurement nether the SLR. At the same fourth dimension the authorities advocated the philosophy of subsidized lending to sure enough sectors. The commission felt that at that topographic point was no ask for involvement subsidy. It made banks handicapped inward price of edifice original strength together with expanding credit supply.
4. Additional Suggestions : Committee besides suggested that the decision of involvement charge per unit of measurement should hold out on grounds of marketplace forces. It farther suggested minimizing the slabs of interest.

Along alongside these major occupation areas M. Narasimham's Committee besides found diverse inconsistencies regarding the banking scheme inward India. In lodge to take them together with larn inward to a greater extent than vibrant together with efficient, it has given the next recommendations.

Narasimham Committee Report I - 1991

The Narsimham Committee was gear upwards inward lodge to study the problems of the Indian fiscal scheme together with to advise closed to recommendations for improvement inward the efficiency together with productivity of the fiscal institution.

The commission has given the next major recommendations:-

1. Reduction inward the SLR together with CRR : The commission recommended the reduction of the higher proportion of the Statutory Liquidity Ratio 'SLR' together with the Cash Reserve Ratio 'CRR'. Both of these ratios were rattling high at that time. The SLR so was 38.5% together with CRR was 15%. This high total of SLR together with CRR meant locking the banking concern resources for authorities uses. It was hindrance inward the productivity of the banking concern thus the commission recommended their gradual reduction. SLR was recommended to trim down from 38.5% to 25% together with CRR from 15% to iii to 5%.
2. Phasing out Directed Credit Programme : In India, since nationalization, directed credit programmes were adopted yesteryear the government. The commission recommended phasing out of this programme. This programme compelled banks to earmark so fiscal resources for the needy together with miserable sectors at confessional rates of interest. It was reducing the profitability of banks together with thus the commission recommended the stopping of this programme.
3. Interest Rate Determination : The commission felt that the involvement rates inward Republic of Republic of India are regulated together with controlled yesteryear the authorities. The decision of the involvement charge per unit of measurement should hold out on the grounds of marketplace forces such equally the demand for together with the furnish of fund. Hence the commission recommended eliminating authorities controls on involvement charge per unit of measurement together with phasing out the concessional involvement rates for the priority sector.
4. Structural Reorganizations of the Banking sector : The commission recommended that the actual numbers of world sector banks ask to hold out reduced. Three to 4 big banks including SBI should hold out developed equally international banks. Eight to Ten Banks having nationwide presence should concentrate on the national together with 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 together with rural financing. They recommended that the authorities should assure that henceforth at that topographic point won't hold out whatever nationalization together with person together with unusual banks should hold out allowed liberal entry inward India.
5. Establishment of the ARF Tribunal : The proportion of bad debts together with Non-performing property (NPA) of Earth sector Banks together with Development Financial Institute was rattling alarming inward those days. The commission recommended the establishment of an Asset Reconstruction Fund (ARF). This fund volition select over the proportion of the bad together with doubtful debts from the banks together with fiscal institutes. It would assistance banks to larn rid of bad debts.
6. Removal of Dual control : Those days banks were nether the dual command of the Reserve Bank of Republic of Republic of India (RBI) together with the Banking Division of the Ministry of Finance (Government of India). The commission recommended the stepping of this system. It considered together with recommended that the RBI should hold out the exclusively original means to regulate banking inward India.
7. Banking Autonomy : The commission recommended that Earth sector banks should hold out gratis together with autonomous. In lodge to pursue competitiveness together with efficiency, banks must relish autonomy so that they tin reform the piece of work civilisation together with banking technology upgradation volition thus hold out easy.

Some of these recommendations were afterwards accepted yesteryear the Government of Republic of Republic of India together with became banking reforms.

Narasimham Committee Report II - 1998

In 1998 the authorities appointed soundless closed to other commission nether the chairmanship of Mr. Narsimham. It is meliorate known equally the Banking Sector Committee. It was told to review the banking reform progress together with blueprint a programme for farther strengthening the fiscal scheme of India. The commission focused on diverse areas such equally uppercase adequacy, banking concern mergers, banking concern legislation, etc.

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

1. Strengthening Banks inward India : The commission considered the stronger banking scheme inward the context of the Current Account Convertibility 'CAC'. It idea that Indian banks must hold out capable of treatment problems regarding domestic liquidity together with central charge per unit of measurement administration inward the lite of CAC. Thus, it recommended the merger of potent banks which volition receive got 'multiplier effect' on the industry.
2. Narrow Banking : Those days many world sector banks were facing a occupation of the Non-performing assets (NPAs). Some of them had NPAs were equally high equally twenty pct of their assets. Thus for successful rehabilitation of these banks it recommended 'Narrow Banking Concept' where weak banks volition hold out allowed to house their funds exclusively inward brusque term together with take chances gratis assets.
3. Capital Adequacy Ratio : In lodge to improve the inherent strength of the Indian banking scheme the commission recommended that the Government should heighten the prescribed uppercase adequacy norms. This volition farther improve their absorption capacity also. Currently the uppercase adequacy ration for Indian banks is at ix percent.
4. Bank ownership : As it had before mentioned the liberty for banks inward its working together with banking concern autonomy, it felt that the authorities command over the banks inward the shape of administration together with ownership together with banking concern autonomy does non larn mitt inward mitt together with thus it recommended a review of functions of boards together with enabled them to adopt professional person corporate strategy.
5. Review of banking laws : The commission considered that at that topographic point was an urgent ask for reviewing together with amending original 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 inward business alongside the acquaint needs of the banking sector inward India.

Apart from these major recommendations, the commission has besides recommended faster computerization, technology upgradation, preparation of staff, depoliticizing of banks, professionalism inward banking, reviewing banking concern recruitment, etc.

Evaluation of Narsimham Committee Reports

The Committee was showtime gear upwards inward 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 together with others were non at all considered. Because of this a minute commission was in ane lawsuit again gear upwards inward 1998.

As far equally 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 hold out fruitful inward making Indian banks to a greater extent than profitable together with efficient.