PRACTICAL EXERCISE 2.

BANKING
SECTOR REFORMS - NARASIMHAM
COMMITTEE -MAIN RECOMMENDATIONS
30 th AUG 16 Dr.V.Sakthirama
Banking Sector Reforms
 Nationalisation of banks in 1969
 Financial repression, limited role of technology, no
risk management etc.
 resulted in low profitability and poor asset quality -
deep economic crises
 GOI - economic reforms
 In august 1991, the Government appointed a
committee on financial system under the
chairmanship of M. Narasimhan
 First Phase Of Banking Sector Reforms / Narasimhan Committee Report –
1991:-

 Establishment of 4 tier hierarchy for banking structure with 3 to 4

large banks (including SBI) at top and at bottom rural banks
engaged in agricultural activities.
 The supervisory functions over banks and financial institutions can be
assigned to a quasi-autonomous body sponsored by RBI.
 Phased reduction in statutory liquidity ratio.
 Phased achievement of 8% capital adequacy ratio.
 Abolition of branch licensing policy.
 Proper classification of assets and full disclosure of accounts of
banks and financial institutions.
 Deregulation of Interest rates.
 Delegation of direct lending activity of IDBI to a separate
corporate body.
 Competition among financial institutions on participating approach.
 Setting up asset Reconstruction fund to take over a portion of loan
portfolio of banks whose recovery has become difficult.
 Banking Reform Measures Of Government
 Lowering SLR (38.5% in 1991 to 25% in 1997, 21.5-2016) And CRR
(from 15% in 1991 to 4.1% in June 2003 , 4-2016)
 Prudential Norms - proper disclosure of income, classification of assets
and provision for Bad debts
- to make 100% provision for all Non-performing Assets (NPAs).
 Deregulation of Interest Rates
a) Scheduled Commercial banks have now the freedom to set interest
rates on their deposits subject to minimum floor rates and maximum
ceiling rates.
b) Interest rate on domestic term deposits has been decontrolled.
c) The prime lending rate of SBI and other banks on general advances of
over Rs. 2 lakhs has been reduced.
d) Rate of Interest on bank loans above Rs. 2 lakhs has been fully
decontrolled.
e) The interest rates on deposits and advances of all Co-operative banks
have been deregulated subject to a minimum lending rate of 13%.
 Recovery Of Debts - “Recovery of debts due to Banks and
Financial Institutions Act 1993”
 Six Special Recovery Tribunals

 Competition From New Private Sector Banks - to raise capital

contribution from foreign institutional investors up to 20% and
from NRIs up to 40%
 Phasing Out of Directed Credit - credit target for priority
sector should be reduced to 10% from 40%
 Access To Capital Market - The Banking Companies (Acquisation
and Transfer of Undertakings) Act was amended to enable the
banks to raise capital through public issues.
 Freedom Of Operation - open new branches and upgrade
extension counters, after attaining capital adequacy ratio and
prudental accounting norms
 Local Area banks (LABs) - for setting up of 7 LABs in private
sector. mobilizing rural savings - in to investment in local areas
 Supervision Of Commercial Banks - Department of Supervision
Second Phase Of Reforms of Banking Sector (1998) /
Narasimhan Committee Report 1998

 importance on structural measures and improvement in

standards of disclosure and levels of transparency
Following are the recommendations of Narasimhan Committee :-
1) Committee suggested a strong banking system especially in
the context of capital Account Convertibility (CAC). The
committee cautioned the merger of strong banks with weak
ones as this may have negative effect on stronger banks.
2) It suggested that 2 or 3 large banks should be given
international orientation and global character.
3) There should be 8 to10 national banks and large number of
local banks.
4) It suggested new and higher norms for capital adequacy.
5) To take over the baddebts of banks committee suggested
setting up of Asset Reconstruction Fund.
6) A board for Financial Regulation and supervision (BFRS)
can be set up to supervise the activities of banks and
financial institutions.
7) There is urgent need to review and amend the provisions
of RBI Act, Banking Regulation Act, etc. to bring them in line
with current needs of industry.
8) Net Non-performing Assets for all banks was to be
brought down to 3% by 2002.
9) Rationalization of bank branches and staff was
emphasized. Licensing policy for new private banks can be
continued.
10) Foreign banks may be allowed to set up subsidiaries and
joint ventures.
 Reforms have been taken
1) New Areas - Insurance, credit cards, asset management,
leasing, gold banking, investment banking etc.
2) New Instruments -For greater flexibility and better risk
management - Interest rate swaps, cross currency forward
contracts, forward rate agreements, liquidity adjustment
facility for meeting day-to-day liquidity mismatch.
3) Risk Management -Banks have started specialized
committees to measure and monitor various risks. They are
regularly upgrading their skills and systems.
4) Strengthening Technology- For payment and settlement
system technology infrastructure has been strengthened with
electronic funds transfer, centralized fund management
system, etc.
5) Increase Inflow Of Credit :-
Measures are taken to increase the flow of credit to priority sector
through focus on Micro Credit and Self Help Groups.
6) Increase in FDI Limit :-
In private banks the limit for FDI has been increased from 49% to 74%.
7) Universal banking :-
Universal banking refers to combination of commercial banking and
investment banking. For evolution of universal banking guidelines
have been given.
8) Adoption Of Global Standards :-
RBI has introduced Risk Based Supervision of banks. Best international
practices in accounting systems, corporate governance, payment and
settlement systems etc. are being adopted.
9) Information Technology :-
Banks have introduced online banking, E-banking, internet banking,
telephone banking etc. Measures have been taken facilitate delivery
of banking services through electronic channels.
10) Management Of NPAs:-
RBI and central government have taken measures for management of
non-performing assets (NPAs), such as corporate Debt Restructuring
(CDR), Debt Recovery Tribunals (DRTs) and Lok Adalts.
11) Mergers And Amalgamation :-
In May 2005, RBI has issued guidelines for merger and
Amalgamation of private sector banks.
12) Guidelines For Anti-Money Laundering :-
In recent times, prevention of money laundering has been given
importance in international financial relationships. In 2004, RBI
revised the guidelines on know your customer (KYC) principles.
13) Managerial Autonomy :-
In February. 2005, the Government of India has issued a managerial
autonomy package for public sector banks to provide them a level
playing field with private sector banks in India.
14) Customer Service:-
In recent years, to improve customer service, RBI has taken many
steps such as :- Credit Card Facilities, banking ombudsman,
settlement off claims of deceased depositors etc.
15) Base Rate System Of Interest Rates:-
In 2003 the system of Benchmark Prime Lending Rate (BPLR) was
introduced to serve as a benchmark rate for banks pricing of
their loan products so as to ensure that it truly reflected the
actual cost. However the BPLR system tell short of its objective.
RBI introduced the system of Base Rate since 1st July, 2010. The
base rate is the minimum rate for all loans. For banking system
as a whole, the base rates were in the range of 5.50% -
9.00% as on 13th October, 2010.
Assignment
 Give summary of major revolution of banking sector
after reforms have been taken based on Narasimhan
Committee Report 1991 &1998
 Discuss about Raghuram Rajan Committee and
suggestion
THANK YOU