The Narasimham Committee-II (1998) made several important recommendations to improve the strength, efficiency, and competitiveness of India’s banking system. These recommendations focused on making banks more professional, reducing risks, and aligning the Indian banking sector with global standards.
1. Autonomy in Banking
The committee recommended giving greater freedom (autonomy) to public sector banks so they can work like professional and competitive institutions.
- Banks should improve their recruitment, training, and salary systems according to global best practices.
- The Reserve Bank of India (RBI) should not have seats on the boards of banks.
- Government representatives on bank boards (like politicians or officials) often interfere in daily operations, so their role should be reduced.
- Bank boards should focus on improving performance and increasing shareholder value.
- It was also suggested that the government’s share in banks be reduced to 33%, although this has not been fully implemented.
2. Reform in the Role of RBI
The committee suggested changes in the functioning of the RBI to avoid conflicts of interest.
- RBI should stop participating in certain financial markets like the 91-day treasury bill market.
- Only banks and primary dealers should operate in call money and term money markets.
- RBI should not act as both regulator and owner of banks, as this creates a conflict of interest.
- RBI should sell its ownership in banks and financial institutions.
As a result:
- A system called Liquidity Adjustment Facility (LAF) was introduced.
- RBI transferred its shareholding in institutions like State Bank of India (SBI), NABARD, and NHB to the Government of India.
3. Stronger Banking System
The committee emphasized making banks stronger and globally competitive.
- Suggested merging large banks to create strong institutions that can compete internationally.
- Proposed a three-tier banking structure:
- Few large international banks
- 8–10 national banks
- Many regional and local banks
- Strong banks should merge with equally strong banks, not weak ones.
- Weak banks should either be improved or closed if they cannot recover.
- Introduced the idea of “narrow banking” for weak banks with high bad loans.
Many bank mergers in India during the late 1990s and early 2000s followed these ideas.
4. Non-Performing Assets (NPAs)
Non-performing assets (bad loans) were a major problem in Indian banking.
- The committee aimed to reduce NPAs to 3% by 2002.
- Causes of NPAs included:
- Poor loan decisions
- Political interference (directed lending)
- Economic conditions
- Suggested setting up Asset Reconstruction Companies (ARCs) to take over bad loans.
- Recommended a proper system to identify and classify NPAs.
- Proposed an independent loan review system.
These suggestions led to the creation of the SARFAESI Act, 2002, which helped banks recover bad loans.
5. Capital Adequacy and Provisioning Norms
To make banks financially strong, the committee recommended:
- Increasing the Capital Adequacy Ratio (CAR):
- 9% by 2000
- 10% by 2002
- Banks failing to meet these norms should face penalties.
- For asset classification:
- Minimum 1% provision for standard assets
- Interest income should be recognized every 90 days instead of 180 days
RBI later implemented these changes by tightening financial rules and improving risk management systems.
6. Entry of Foreign Banks
The committee supported the entry of foreign banks with proper conditions.
- Minimum capital requirement should be $25 million (increased from $10 million).
- Foreign banks can:
- Set up subsidiaries
- Form joint ventures
- They should be treated equally with private sector banks in India.
Conclusion
The Narasimham Committee-II (1998) played a crucial role in modernizing India’s banking system. Its recommendations helped improve efficiency, reduce risks, strengthen banks, and make the system more aligned with international standards. Many of today’s banking reforms in India are based on these important suggestions.