Scribd
Upload
80 views

Banking Sector Reforms: by Bhupinder Nayyar

The Narsimham Committee I was constituted in 1991 to recommend reforms to improve the efficiency and effectiveness of India's financial system and banking sector. The committee recommended 15 reforms including phasing out statutory preemptions and directed credit programs, interest rate deregulation, restructuring banks, improving transparency and loan recovery, and strengthening regulation and supervision of banks. Many recommendations such as reducing statutory reserves and introducing private banks were accepted and implemented.

Uploaded by

Praveen Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
80 views

Banking Sector Reforms: by Bhupinder Nayyar

The Narsimham Committee I was constituted in 1991 to recommend reforms to improve the efficiency and effectiveness of India's financial system and banking sector. The committee recommended 15 reforms including phasing out statutory preemptions and directed credit programs, interest rate deregulation, restructuring banks, improving transparency and loan recovery, and strengthening regulation and supervision of banks. Many recommendations such as reducing statutory reserves and introducing private banks were accepted and implemented.

Uploaded by

Praveen Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 18

BANKING SECTOR REFORMS

By Bhupinder Nayyar
Banking
sector
reforms

Narsimham
Narsimham
Committee
Committee I
II
 Persistent deterioration in the economic health
and looming danger to the banking system called
for quick but comprehensive remedial measures.
 A high power committee was constituted under
the chairmanship of Shri. M. Narsimham in
August, 1991.
 To recommend measures to improve efficiency
and effectiveness of Indian Financial system and
suggest changes in the banking sector.
The Committee submitted its report in
November,1991. The main
recommendations of this committee
were:

1. Phased reduction of statutory pre-emption:


The committee recommended that SLR to be
reduced from 38.5% to 25% and CRR from 15% to
10% over a period of time so that funds of banks
are deployed by them in more productive loan
assets.
This recommendation was accepted and SLR was
brought down from 38.5% to 25% and CRR was
reduced from 15% to 10% and then to 5 %.
2. Interest rate on CRR balances:
The committee had recommended payment of
3% interest on eligible balances (cash balances
above the minimum of 3%.
The recommendation was implemented and 4%
interest on eligible cash balances was paid.
3. Phasing out of directed credit program:
 The committee recommended that priority sector
to be redefined to comprise the small and
marginal farmers, the tiny sector of industry, small
business and transport operators, village and
cottage industries, rural artisans and other
weaker sections.
 The committee recommended that target for the
priority sector should be fixed from 40% to 10% of
aggregate credit. But this recommendation was
not accepted.
4. Transparency:
 The committee recommended that the format of
bank balance sheet and profit and loss account
should be modified in such a manner that bank’s
balance sheet disclose more information.
 This recommendation was accepted.
5. Loan recovery:
 The committee recommended that government
should take steps to ensure recovery of bank
dues by creating some special recovery tribunals
and provide for quick recovery process.
6. Interest rate deregulation:
 The committee suggested that existing
interest structure on loans and deposits is
very complex and hence suggested that they
should be market driven.
 This recommendation was very well
accepted.
7. Restructuring of banks:
 The committee recommended that the banks
be restructured by creating 3-4 large banks of
international character, 8-10 national banks
with network of branches throughout the
country, local and rural banks.
 No progress in this regard was made except
that in 1993 a loss making bank, New Bank of
India was merged with Punjab National Bank.
8. Asset classification: The committee recommended
that the assets of the banks should be classified into
4 categories:

Assets

Sub-
Standard Doubtful Loss assets
standard

Secured Unsecured -
No 10% 100%
portion - 20- 100 %
provision provision provision
50% provision
9. Entry of Private Banks:
 The committee proposed that the government
should indicate that there would be no further
nationalization of banks.
 Entry of private banks should be encouraged.
There should be no difference in treatment
between public sector and private sector banks.
 It was implemented.
10. Branch Licensing:
 The committee recommended that branch
licensing be abolished and matter of operating
and closing of branches be left to commercial
judgement of individual banks.
 It was implemented.
11. Capital adequacy ratio: The committee
recommended that the banks and financial
institutions should achieve a minimum 4%
CAR by March, 1993 and 8% by March, 1996.
RBI implemented the committee’s
recommendation on capital adequacy norms.
Now the CAR is 9%. Some of the banks are
even maintaining more than this ratio.
12.Income recognition: The committee
recommended that the banks should
adopt same accounting practices in
regard to income recognition and
provisioning against doubtful debts.
12. Foreign Banks: The committee
recommended that foreign banks be allowed
to open offices in India. However, they should
be subjected to same requirements as
applicable to domestic banks. It was
implemented.
14. Supervision of banks: The committee
stressed on Internal audit and internal
inspection system of banks based on reports.
Audit and inspection machinery should be
adequate and conform to well laid down
norms. It was implemented.
15. Control: The committee was of the opinion
that there should be end of duality of control
over banking system between RBI and
Ministry of finance and only RBI should
control the banking system.
Thank you
for
watching.

You might also like