Understanding Narasimham Committee and Its Impact on Indian Banking

The Narasimham Committee was a significant turning point in the Indian banking sector. It was formed in 1991 to recommend reforms in the banking system.

The committee was headed by M. Narasimham, a former Governor of the Reserve Bank of India. Its recommendations aimed to improve the efficiency and competitiveness of Indian banks.

One of the key recommendations was to reduce the number of public sector banks from 20 to 6. This was done to make the banks more efficient and reduce the burden on the government.

The committee also suggested that banks should focus on core banking activities and divest non-core assets. This move was intended to improve the banks' financial health and reduce their dependence on the government.

The Narasimham Committee was formed in response to India's economic liberalisation in 1991, when the banks were not functioning properly.

The Committee's chairman, Maidavolu Narasimham, was a seasoned expert, having served as the 13th governor of RBI from 1977 to 1977.

The Committee's first report was introduced on December 17th, 1991, in the parliament, marking a significant step towards reforming India's financial system.

The Committee was established by ex-Finance Minister Dr. Manmohan Singh, who recognized the need for an efficient banking system to drive economic development.

The Committee's recommendations aimed to modernize and stabilize India's banking system, with the 1991 report focusing on reducing regulatory ratios, phasing out directed credit programs, and deregulating interest rates.

The Narasimham Committee met in 1991 and 1998 to reform India's financial system.

The committee's 1991 report was a game-changer, recommending significant changes to the banking system.

Reducing statutory liquidity and cash reserve ratios was a key aspect of the 1991 report.

The committee also suggested phasing out directed credit programs, which was a major overhaul of the system.

Deregulating interest rates was another crucial recommendation from the 1991 report.

This move was aimed at increasing competition and efficiency in the banking sector.

The 1998 report built upon the 1991 recommendations, with a focus on strengthening banks' capital adequacy.

Narrowing the scopes of weak banks was also a key suggestion from the 1998 report.

Reviewing banking laws and increasing bank autonomy and privatization were other recommendations from the 1998 report.

In 1991, India's economy was going through a period of liberalization, but the banking system was not functioning properly.

The Government of India felt the need for an efficient banking system to support economic development, and ex-Finance Minister Dr. Manmohan Singh established the Narasimham Committee to examine the banking system.

On August 14, 1991, the Government of India appointed a nine-member team called the Narasimham Committee I, with Maidavolu Narasimham as its chairman.

Narasimham had previously served as the 13th Governor of the Reserve Bank of India (RBI) from May 2, 1977 to November 30, 1977.

The first report of the Narasimham Committee was introduced in the parliament on December 17, 1991.

Here's a brief timeline of the key events in 1991:

The Narasimham Committee's second set of recommendations, made in 1998, focused on further reforms in the banking sector. The committee suggested that banks should consider market risks in addition to credit risks when determining capital adequacy requirements.

One key recommendation was to introduce an additional capital requirement of 5% of the foreign exchange open position limit, which would be integrated into the calculation of risk-weighted assets. The committee also recommended that foreign exchange open position limits should carry a 100% risk weight.

To improve income recognition, the committee suggested introducing a norm of 90 days in a phased manner. This would help banks to more accurately reflect their income and reduce the risk of non-performing assets.

Banks were also advised to take effective steps to reduce non-performing assets and put in place risk management systems and practices to prevent the re-emergence of fresh NPAs. This would help to improve the overall health and stability of the banking sector.

The committee also permitted public sector banks to recruit skilled personnel from the open market or through campus recruitment, in areas such as information technology, risk management, and treasury operations. This would help to bring in fresh talent and expertise to the banking sector.

In addition, the committee allowed banks to issue bonds to augment their Tier II capital, without the need for a government guarantee. This would provide banks with more flexibility and options for raising capital.

The Narasimham Committee's reports and publications have been instrumental in shaping the banking sector in India.

The committee submitted its first report in 1991, which focused on the banking sector's reform and restructuring.

Key recommendations from this report included the abolition of the cash reserve ratio for banks, allowing them to use their funds more efficiently.

The committee also suggested the introduction of a prudential code for banks, which aimed to improve their risk management practices.

The Narasimham Committee's first report in 1991 was a significant milestone in India's financial system. It was submitted to the Government on November 16, 1991.

The committee was set up on August 14, 1991, with nine members. The report was tabled in the Parliament on December 17, 1991.

The committee recommended a broad pattern of the banking system's structure. This included 3 or 4 larger banks, which could become international in character.

These larger banks would be accompanied by 8 to 10 national banks with a network of branches throughout the country. They would engage in universal banking.

Local banks would operate in specific regions, while rural banks would focus on rural areas and finance agricultural activities. The committee believed that the move towards this revised system should be market-driven and based on profitability considerations.

Here's an overview of the recommended banking structure:

The second report of the Narasimham Committee was submitted in April 1998. This report reviewed the progress of the implementation of banking reforms since 1992.

The committee's main aim was to further strengthen the financial institutions of India. The report made several recommendations on structural issues in the banking sector.

One of the key recommendations was that mergers between banks and between banks and DFI's and NBFC's should be based on synergies and locational and business specific complimentary of the concerned institutions.

The committee also suggested that public sector bank mergers should emanate from the management of banks with the government as the common shareholder playing a supportive role.

Mergers should not be seen as a means of bailing out weak banks, but rather as a way to create stronger institutions through the merger of strong banks/FIs.

The Narasimham Committee proposed a number of reforms for the banking sector, with a focus on improving the efficiency and competitiveness of Indian banks.

One of the key recommendations was to reduce the number of public sector banks from 20 to 6, by merging smaller banks with larger ones.

The committee suggested that banks should be allowed to raise capital through the issue of shares, which would help them to expand their operations and improve their financial stability.

The Narasimham Committee also recommended that banks should be allowed to operate as commercial banks, rather than being subject to government control.

The committee proposed that banks should be allowed to lend to non-banking financial companies, which would help to increase the flow of credit to the economy.

The Narasimham Committee's recommendations were aimed at making the Indian banking sector more competitive and efficient, and at reducing the role of the government in the sector.

The committee suggested that banks should be allowed to charge higher interest rates on loans, which would help to increase their profitability and competitiveness.

The Narasimham Committee's reforms were intended to help Indian banks to compete with foreign banks, and to improve the overall efficiency of the banking sector.