The narasimham committee (1991) assumed that the financial resources of the commercial banks from the general public and were by the banks in trust and that the bank funds were to be deployed for maximum benefit of the depositors. This assumption automatically implied that even the government had no business to endanger the solvency, health and efficiency of the nationalized banks under the pretext of using banks funds for social banking, poverty eradication, etc. Accordingly, the narasimham committee aimed at achieving three major changes in the banking sector in India;
- Ensuring a degree of operational flexibility.
- Internal autonomy for the banks in their decision making process.
- Greater degree of professionalism in banking operations.
Towards this end, narasimham committee recommendations covered such subjects as directed investments, directed credit programmes, structural of rate of interest, structural reorganization of the Indian banking system, and organization, methods and procedures of banks in India.
In Structural Reorganization of The Banking System
To bring about greater efficiency in banking operations, the narasimham committee (1991) proposed substantial reduction in number of public sector banks through mergers and acquisition. According to committee, the broad pattern should consist of;
- Three or four large banks including SBI should become international in character.
- Eight to ten banks should national bank with wide network of branches through out the country.
- The rest should remain as local banks with operations be confined to a specific region.
- RBI should permit the establishment of new banks in the private sector, provided they conform to the minimum start-up capital and other requirements. The government should make declaration that no further banks be nationalized.
- Foreign banks are allowed to open their branches in India either as fully owned or subsidiaries. This would improve efficiency.
- Foreign banks and Indian banks are allowed to set-up joint ventures in regard to merchant and investment banking.
- Since the country had already a network of rural and semi-urban branches, the system of licensing of branches with the objective of spreading the banking habit should be discontinued. Banks should have freedom to open branches.
On Organization And Methods And Procedures In Banks
In order to tone up the working of the banks, the narasimham committee (1991) recommended that;
- Each bank should be free and autonomous.
- Every bank should go for a radical change in working technology and culture, so to become competitive internally and to be in step with wide- ranging innovations taking place.
- Over- regulation and over- administration should be avoided and greater reliance should be placed on internal audit and internal inspection.
- The various guidelines issued by government or RBI in regard to internal administration should be examined in the context of the independence and autonomy of bank.
- The quality of control over the banking system between RBI and the banking division of ministry and finance should end forthwith and RBI should be the primary agency for regulation.
- The appointment of chief executive of bank and the board of directors should not be based on political considerations but on professionalism and integrity.
So despite impressive quantitative achievements in resources mobilization and in extending the credit reach, several distortions had crept into the banking system over the years. Several public sector banks had become weak financially and were unable to meet the challenges of the competitive environment. The narasimham committee was forthright in apportioning the blame to the government of India and the finance ministry of this sad state of affairs. The public sector banks has been used and abused by the government, the officials and the bank employees and the trade unions. The recommendations of narasimham committee(1991) has been revolutionary in many aspects and were opposed by trade unions and even by finance ministry of central government and of course, the progressive economist who generally championed the public sector banks. The government however accepted many of the recommendations of the narasimham committee (1991).