2. • Headed by Mr. M. Narasimham, who was
the 13th Governor of RBI
• First Committee, known as Narasimham
Committee I, was appointed in August
1991, against the backdrop of the Balance
of Payment Crisis
• Set up to analyze all factors related to
financial system and give recommendation
to improve its efficiency and productivity
• The Second Committee, Known as
Narasimham Committee II, was appointed
in 1998
• It was given the task to review the
implementation of the Banking Sector

4. • Narasimham Committee I was a nine-member
committee set up by the Government of India on
14 August 1991
• It was set up to examine all aspects relating to the
structure, organisation, functions and procedures
of the financial system
• The Committee submitted its report to the
Government on November 16, 1991
• The report was tabled in the Parliament on
December 17, 1991

5. • Reduction in CRR and SLR
• Phasing out Directed Credit Programmes
• Interest Rate Deregulation
• Structural Reorganization of Banks
• Change in the Control Structure of Banks
• Establishment of ARF tribunal
• Change in Classification of Assets
• Allowing Banks to raise Capital
• Liberalization of Capital Markets

6. • One of the most important recommendations made by the
committee was a drastic reduction in CRR and SLR
• Committee noted that the high amount of CRR and SLR
was hindering the productivity of Banks considerably
• SLR was recommended to reduce from 38.5 % to 25%
and CRR was recommended to be reduced to 15% to a
range of 3-5% by 1996-97

7. • The committee acknowledged the role of these programs
in extending the reach of Banking system to the neglected
sectors of the economy
• However, it also called for re-examination of the present
relevance of these programs, especially for those sectors
which had become self-sufficient
• Accordingly, the committee proposed that the directed
credit committees should be phased out
• It also called for a re-defining of the priority sector

8. • The Committee observed that the prevailing structure of
administered rates was highly complex and rigid and
called for deregulating it so that it reflects the emerging
market conditions
• However, it warned against instant deregulation and
suggested that the rates be brought in line with the
market rates gradually over a period of time
• The Committee also recommended phasing out
Concessional Interest rates

9. In regard to the structure of the Banking System, The
Committee believed that the structure should consist of:
• 3-4 Banks (Including SBI) becoming International Banks
• 8 to 10 national banks with a network of branches
throughout the country engaged in 'universal' banking
• Local banks whose operations would be generally confined
to a specific region
• Rural banks (including RRBs) whose operations would be
confined to the rural areas and whose business would be
predominantly engaged in financing of agriculture and
allied activities

10. • The move towards this revised system should be market
driven and based on profitability considerations and
brought about through a process of mergers and
acquisitions
• The Committee also called on the Government to stop
further nationalization of Banks
• It also proposed that there be no bar to start new banks in
the private sector being set up provided they conform to
the start-up capital and other requirements
• It also called for liberalizing the process of foreign banks
entering the country

11. • The committee recommended that RBI should be the
sole authority in-charge of controlling the Banks
• It also called for greater autonomy to be given to Public
sector banks.
• The Committee believed that the internal organization
should be the prerogative of the management of the
Individual Banks
• For the medium and large national banks the Committee
proposed a three-tier structure in terms of head office, a
Zonal office and branches
• For very large banks, a four tier-structure was
proposed, with the addition of a regional office along with
the three mentioned above

12. • Those days, the proportion of bad debts and non-
performing assets of the public sector banks and
Development financial institutes was very high.
• The committee recommended the establishment of an
Asset Reconstruction Fund (ARF)
• The suggestion was that the ARF would take over the
proportion of the bad and doubtful debts from the banks
and financial institutes.
• All bad and doubtful debts of the banks were to be
transferred in a phased manner to ensure smooth and
effective functioning of the ARF
• The committed also suggested the formation of special
tribunals to recover loans granted by the bank

13. • The Committee recommended that the assets of bank
should be classified into 4 categories: (a) standard (b)
sub-standard (c) doubtful, and (d) loss assets
• It also called for full and transparent disclosures to be
made in the Balance Sheet as recommended by the
International Accounting Standards Committee

14. • The Committee recommended that profitable banks and
banks with good reputation should be permitted to raise
capital from the public through the capital market
• Regarding other banks, the government should subscribe
to their capital or give a loan, which should be treated as
a subordinate debt, to meet their capital requirements

15. • The Committee suggested that there should be no need
to obtain any prior permission to issue capital
• It also called for the office of the “Controller of capital
issues” to be abolished
• The Committee also recommended that the Capital
markets should be opened for Foreign Portfolio
Investments

17. • Setup by the Finance Ministry of the Government of India
under the chairmanship of Mr M. Narasimham in 1998.
• Committee submitted the report in April 1998
• Aim was to review the progress of the implementation of
the banking reforms since 1992 with the aim of further
strengthening the financial institutions of India
• Report focused on issues like size of banks and capital
adequacy ratio

18. Need for a Stronger Banking System:
• The Narasimham Committee has made out a
strong case for a stronger banking system in the
country
• Recommended the merger of strong banks which
will have a “multiplier effect” on industry
• Recommended the use of mergers to build the size
and strength of operations for each bank
• Committee has also supported that two or three
large strong banks be given international or global

19. • Many public sector banks were facing a problem of the
Non-performing assets (NPAs)
• Some of them had NPAs were as high as 20 percent of
their assets
• For successful rehabilitation of these banks, the
committee recommended 'Narrow Banking Concept'
• Weak banks will be allowed to place their funds only in
short term and risk free assets.

20. • To improve the inherent strength of the Indian banking
system the committee recommended that the Government
should raise the prescribed capital adequacy norms
• This would improve their Risk absorption capacity
• The committee targeted raising the capital adequacy ratio
to 9% by 2000 and 10% by 2002
• Recommended penal provisions for banks that fail to meet
these requirements

21. • Greater autonomy was proposed for the public sector
banks in order for them to function with equivalent
professionalism as their international counterparts
• Committee recommended GOI equity in nationalized banks
be reduced to 33% for increased autonomy
• RBI should relinquish its seats on the board of directors of
these banks
• Committee recommended a review of functions of banks
boards with a view to make them responsible for
enhancing shareholder value through formulation of
corporate strategy and reduction of government equity

22. • Committee considered that there was an urgent need for
reviewing and amending main laws governing Indian
Banking Industry
• RBI Act, Banking Regulation Act, State Bank of India
Act, Bank Nationalization Act, etc.
• This upgradation will bring them in line with the present
needs of the banking sector in India

23. • Narasimham Committee-II also highlighted the need for
'zero' non-performing assets for all Indian banks with
International presence
• Committee recommended creation of Asset
Reconstruction Funds or Asset Reconstruction
Companies to take over the bad debts of banks, allowing
them to start on a clean-slate
• Committee recommended a proper system to identify and
classify NPAs and for an independent loan review
mechanism for improved management of loan portfolio

24. Implementation:
• To implement these recommendations, the RBI in Oct
1998, initiated the second phase of financial sector
reforms on the lines of Narasimham Committee-II report
• RBI raised Capital Adequacy Ratio by 1%
• Tightened the prudential norms for provisioning and
asset classification in a phased manner
• RBI targeted to bring the capital adequacy ratio to 9% by
March 2001

25. • The mid-term Review of the Monetary and Credit Policy of
RBI announced another series of reforms, in line with the
recommendations with the Committee, in October 1999
• Criteria for “autonomous status” was identified by March
1999 and 17 banks were considered eligible for autonomy
• Committee's recommendations let to introduction of a new
legislation in 2002, Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest
Act, 2002
• But some recommendations like reduction in Government's
equity to 33%, the issue of greater professionalism and
independence of the board of directors of public sector
banks is still awaiting Government follow-through and

26. • Recommendations were far-fetched and far-ahead of their times
• Recommendations were well received, leading to successful
implementation of most of its recommendations
• During the 2008 economic crisis, performance of Indian banking
sector was far better than their international counterparts
• This was credited to the successful implementation of the
recommendations of the Narasimham Committee-II with
particular reference to the capital adequacy norms and the
recapitalization of the public sector banks
• Impact of the two committees has been so significant that the
financial-economic sector professionals have been applauding
there positive contribution

27. • “Banking” – by N. T. Somashekar
• www.rbi.org.in
• www.nabard.org/fileupload/DataBank/Newsletters/March
1992.pdf
• http://www.expressindia.com/fe/daily/19971230/3645526
3.html