The Narasimham Committee, chaired by Maidavolu Narasimham, was instrumental in shaping the financial and banking sector reforms in India during the 1990s. Two committees were formed, commonly referred to as Narasimham Committee-I (1991) and Narasimham Committee-II (1998). These committees addressed significant issues in the banking system and laid the groundwork for India’s transition to a more liberalized and globally competitive financial sector. Below are key aspects of the Narasimham Committee’s background and recommendations:
Background
The Indian banking system faced several challenges during the 60s and 70s, exacerbated by nationalization and rigid policies, which ultimately culminated in a balance of payments crisis in 1991. The government had to seek assistance from the International Monetary Fund (IMF). This crisis prompted India to pursue economic liberalization, marking the beginning of a series of reforms aimed at overhauling the banking sector.
The Narasimham-I Committee (1991) was established by then Finance Minister Manmohan Singh to address the inefficiencies in the Indian financial system. Later, the Narasimham-II Committee (1998) was formed under Finance Minister P. Chidambaram to review the progress of reforms and suggest further improvements.
Key Recommendations of the Narasimham Committees
1. Autonomy in Banking
The committee recommended greater autonomy for public sector banks to enable them to operate more professionally, like their international counterparts. It proposed that recruitment, training, and remuneration policies should align with global best practices. The committee also urged for a reduction in government interference by decreasing government equity in banks and making the boards of directors more independent.
2. Reforming the Role of the RBI
The committees recommended that the Reserve Bank of India (RBI) should withdraw from certain functions, including ownership in banks, to avoid a conflict of interest. They proposed that the RBI focus solely on its role as a regulator. This led to the establishment of the Liquidity Adjustment Facility (LAF) and the transfer of the RBI’s stake in banks like the State Bank of India (SBI) to the Government of India.
3. Stronger Banking System
The committees recommended merging large Indian banks to create a strong banking system capable of supporting international trade. They suggested a three-tier structure: a few large international banks, several national banks, and numerous regional banks. The committees also supported narrow banking for weaker banks to focus on low-risk investments and suggested closing non-viable banks.
4. Non-Performing Assets (NPA)
The committees recognized the issue of non-performing assets (NPA) as a significant problem. They recommended the creation of Asset Reconstruction Funds/Companies to handle bad loans and proposed a goal of reducing NPAs to 3% by 2002. The introduction of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (2002) helped address this issue.
5. Capital Adequacy
To enhance the strength of Indian banks, the committees recommended raising the capital adequacy ratio to 9% by 2000 and 10% by 2002. This was intended to improve the risk-taking ability of banks. The RBI implemented these recommendations, tightening prudential norms and capital requirements.
6. Entry of Foreign Banks
The Narasimham-II Committee recommended increasing the minimum startup capital requirement for foreign banks operating in India and allowing them to establish subsidiaries and joint ventures to be treated on par with domestic private banks.
Implementation and Impact
Many of the committees’ recommendations, such as capital adequacy norms and stricter provisioning for NPAs, were implemented by the RBI and the government. These reforms helped the Indian banking sector weather the global financial crisis of 2008 better than many other countries. However, some recommendations, like reducing government ownership in banks, remain partially implemented.