First Report by Narasimhan Committee
The first report of the Narsimhan committee on the financial system had recommended a broad pattern of the structure of the banking system as under:
- 3 or 4 larger banks (including the State Bank of India) which could become international in character.
- 8 to 10 national banks with a network of branches throughout the country engaged in universal banking.
- Local banks whose operations would be generally confined to a specific region.
Rural banks (including RRB’s) whose operations would be confined to the rural areas and whose business would be predominantly engaged in financing of agricultural and allied activities.
The Narsimhan committee was of the view that the move towards this revised system should be market driven and based on profitability considerations and brought about through a process of mergers and acquisitions.
Second Report by Narsimhan Committee (1998)
The second report of the Narsimhan committee on the banking sector reforms on the structural issues made following recommendations.
Merger between banks and between banks and DFI’s and NBFC’s need to be based on synergies and locational and business specific complimentary of the concerned institutions and must obviously make sound commercial sense. Mergers of public sector banks should emanate from the managements of banks with the govt. as the common shareholder playing a supportive role. Such mergers however can be worthwhile if they lead to rationalization of workforce and branch network otherwise the mergers of public sector banks would tie down the management with operational issues and distract attention from the real issue. It would be necessary to evolve policies aimed at right sizing and redeployment of the surplus staff either by the way of retraining them and giving them appropriate alternate employment or by introducing a VRS with appropriate incentives. This would necessitate the corporation and understanding of the employees and towards this direction. Management should initiate discussion with the representatives of staff and would need to convince their employees about the intrinsic soundness of the idea, the competitive benefits that would accrue and the scope and potential foe employees’ own professional advancement in a larger institution. Mergers should not be seen as a means of bailing out weak banks. Mergers between strong banks/FIs would make for greater economic and commercial sense and would greater than the sum of its parts and have a force multiplier effect.
It can hence be seen from the recommendations of Narsimhan Committee that mergers of the public sector banks were expected to emanate from the management of the banks with government as common shareholder playing a supportive role.