The Narasimham Committee (1991) is one of the most important reform committees in the history of the Indian banking system. It was set up at a time when India was facing a serious economic and balance of payments crisis. The banking system was highly controlled, inefficient, and burdened with poor asset quality.
The committee is officially known as the Committee on Financial System, and it was chaired by M. Narasimham, a former Governor of the Reserve Bank of India. Its main objective was to examine the structure of the financial system and suggest reforms to make the banking sector more efficient, competitive, strong, and market-oriented.
Background and Need for the Committee
Before 1991, the Indian banking system was characterised by heavy government control, high statutory pre-emptions like SLR and CRR, directed lending under priority sector norms, and administered interest rates. Banks had limited operational freedom and were often forced to lend to unproductive sectors. As a result, profitability was low and non-performing assets (NPAs) were rising.
The economic reforms of 1991 required a strong and healthy banking system that could support liberalisation, privatisation, and globalisation. In this background, the Narasimham Committee was appointed to recommend structural and operational reforms in the banking sector.
Objectives of the Narasimham Committee (1991)
The main objective of the committee was to create an efficient, competitive, and stable banking system that could support economic growth. It aimed to improve financial health, profitability, and customer orientation of banks.
The committee focused on:
- Improving efficiency and productivity of banks
- Strengthening the financial system
- Reducing government control and interference
- Introducing market discipline in banking operations
Key Recommendations of Narasimham Committee (1991)
Reduction in Statutory Pre-emptions
One of the most important recommendations was the reduction in CRR and SLR. At that time, a large portion of bank resources was locked in low-yield government securities. The committee suggested lowering these ratios so that banks could use more funds for productive lending to the private sector.
This step was necessary to improve bank profitability and credit availability in the economy.
Deregulation of Interest Rates
The committee recommended the gradual deregulation of interest rates. Earlier, interest rates were fixed by the government and RBI, which distorted credit allocation. The committee suggested allowing banks to decide interest rates based on market conditions, cost of funds, and risk.
This helped in improving efficiency, competition, and transparency in the banking system.
Introduction of Prudential Norms
A major reform suggested by the committee was the introduction of internationally accepted prudential norms. These included:
- Income recognition norms
- Asset classification norms
- Provisioning norms
These norms ensured that banks disclosed their true financial position and maintained financial discipline. The concept of Non-Performing Assets (NPAs) became clearly defined after these reforms.
Capital Adequacy and Strengthening of Banks
The committee recommended that banks should maintain a minimum Capital Adequacy Ratio (CAR) in line with international standards (Basel norms). Strong capital base was considered essential to absorb losses and maintain confidence in the banking system.
Banks were asked to raise capital from the market and reduce dependence on government support.
Phasing Out of Directed Credit
The committee suggested reducing the extent of directed credit programmes, including priority sector lending. While it did not recommend complete abolition, it proposed rationalisation so that banks could lend based on commercial considerations.
This recommendation aimed at improving asset quality and reducing NPAs.
Entry of Private Sector Banks
To increase competition and efficiency, the committee recommended allowing new private sector banks into the banking system. This broke the monopoly of public sector banks and introduced better technology, customer service, and innovation.
As a result, banks like HDFC Bank, ICICI Bank, and Axis Bank came into existence.
Reduction in Government Control
The committee strongly recommended reducing direct government interference in bank management. It suggested professionalisation of bank boards and autonomy in decision-making, especially in matters related to lending, recruitment, and branch expansion.
This was necessary to improve accountability and performance.
Structural Reforms in Banking
The committee proposed a three-tier banking structure:
- A few large banks with international presence
- National banks catering to the domestic economy
- Regional and local banks focusing on specific areas
This structure aimed to improve specialisation and efficiency in banking operations.
Impact of Narasimham Committee (1991)
The recommendations of the Narasimham Committee marked the beginning of banking sector reforms in India. Many of its suggestions were gradually implemented, leading to:
- Improved financial health of banks
- Better asset quality and transparency
- Increased competition and efficiency
- Adoption of modern banking practices
It is important to remember that this committee laid the foundation for later reforms, including the Narasimham Committee II (1998).
Conclusion
The Narasimham Committee (1991) played a transformational role in reforming the Indian banking system. Its recommendations shifted Indian banking from a highly regulated and controlled framework to a more competitive, market-oriented, and prudentially regulated system.