In spite of the optimistic views about the growth of banking industry in terms of branch expansion, deposit mobilization etc, several distortions such as increasing NPAs and obsolete technology crept into the system, mainly due to the global changes occurring in the world economy. In this context, the finance ministry of Government of India appointed Mr. M. Narasimham as chairman of one more committee, this time it was called as the committee on banking sector reforms. The committee was asked to “review the progress of banking sector reforms to the date and chart a programme on financial sector reforms necessary to strengthen India’s financial system and make it internationally competitive”. The Narasimham committee on banking sector reforms submitted this report to the government in April 1998. This report covers the entire issues relating to capital adequacy, bank mergers, the condition of global sized banks, recasting of banks boards etc.
The main recommendations of the Narasimham committee on banking sector reforms are as follows:
- Need For Stronger Banking System: The Narasimham committee has made out a stronger banking system in country, especially in the context of capital account convertibility (CAC) which would involve large amount of inflow and outflow of capital and consequent complications for exchange rate management and domestic liquidity. To handle this India would need a strong resilient banking and financial system.
- Experiment With The Concept of Narrow Banking: The Narasimham committee is seriously concerned with the rehabilitation of weak public sector banks which have accumulated a high percentage of Non-Performing Assets (NPA), and in some cases, as high as 20% of their total assets. They suggested the concept of narrow banking to rehabilitate such weak banks.
- Small Local Banks: The Narasimham committee has argued that “While two or three banks with an international orientation and 8 to 10 of larger banks should take care of their needs of the large and medium corporate sector ad larger of the small enterprises, there will still be a need for a large number of local banks.” The committee has suggested the setting up of small local banks which should be confined to states or clusters of districts in order to serve local trade, small industry etc.
- Capital Adequacy Ratio: The Narasimham committee has also suggested that the government should consider raising the prescribed capital adequacy ratio to improve the inherent strength of banks and to improve their risk taking ability.
- Public Ownership And Real Autonomy: The Narasimham committee has argued that government ownership and management of banks does not enhance autonomy and flexibility in working of public sector banks. Accordingly, the committee has recommended a review of functions of banks boards with a view to make them responsible for enhancing shareholder value through formulation of corporate strategy.
- Review And Updating Banking Laws: The Narasimham committee has suggested the urgent need to review and amended the provisions of RBI Act, Banking Regulation Act, State Bank of act etc so as to bring them on same line of current banking needs.
Apart from these major recommendations, the committee has also recommended faster computerization, technology up-gradation, training of staff, depoliticizing of banks, professionalism in banking, reviewing bank recruitment, etc.
Really speaking there was no purpose of setting up the second Narasimham committee on banking sector reforms even before a decade has elapsed for the full implementation of the recommendations of First committee. As one critics has commented: “ barring this is, a stray recommendation here or there like the categorical rejection of the merger of weak with strong banks and the suggestion to try out narrow banking, as far as all other issues are concerned”