Recommendations of Narasimham Committee Report (1991)

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, recommendations of Narasimham committee 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.

  1. Reduction in the SLR and CRR : The committee recommended the reduction of the higher proportion of the Statutory Liquidity Ratio ‘SLR’ and the Cash Reserve Ratio ‘CRR’. Both of these ratios were very high at that time. The SLR then was 38.5% and CRR was 15%. This high amount of SLR and CRR meant locking the bank resources for government uses. It was hindrance in the productivity of the bank thus the committee recommended their gradual reduction. SLR was recommended to reduce from 38.5% to 25% and CRR from 15% to 3 to 5%.
  2. Phasing out Directed Credit Programme : In India, since nationalization, directed credit programmes were adopted by the government. The committee recommended phasing out of this programme. This programme compelled banks to earmark then financial resources for the needy and poor sectors at confessional rates of interest. It was reducing the profitability of banks and thus the committee recommended the stopping of this programme.
  3. Interest Rate Determination : The committee felt that the interest rates in India are regulated and controlled by the authorities. The determination of the interest rate should be on the grounds of market forces such as the demand for and the supply of fund. Hence the committee recommended eliminating government controls on interest rate and phasing out the concessional interest rates for the priority sector.
  4. Structural Reorganizations of the Banking sector : 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.
  5. Establishment of the ARF Tribunal : The proportion of bad debts and Non-Performing Assets (NPA) of the public sector Banks and Developmental Financial Institutions was very alarming in those days. The committee recommended the establishment of an Asset Reconstruction Fund (ARF). This fund will take over the proportion of the bad and doubtful debts from the banks and financial institutions. It would help banks to get rid of bad debts.
  6. Removal of Dual control : Those days banks were under the dual control of the Reserve Bank of India (RBI) and the Banking Division of the Ministry of Finance (Government of India). The committee recommended the stepping of this system. It considered and recommended that the RBI should be the only main agency to regulate banking in India.
  7. More Freedom to 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 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).

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]

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