The banking sector reforms in India were started as a follow up measures of the economic liberalization and financial sector reforms in the country. The banking sector being the life line of the economy was treated with utmost importance in the financial sector reforms. The reforms were aimed at to make the Indian banking industry more competitive, versatile, efficient, productive, to follow international accounting standard and to free from the government’s control. The reforms in the banking industry started in the early 1990s have been continued till now.
The Narasimham Committee laid the foundation for the reformation of the Indian banking sector. Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector.
The purpose of the Narasimham Committee I was to study all aspects relating to the structure, organization, functions and procedures of the financial systems and to recommend improvements in their efficiency and productivity. The Narasimham Committee II was tasked with the progress review of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India. It focussed on issues like size of banks and capital Adequacy ratio among other things
First Report by Narasimham Committee (1991)
Narasimham Committee I was a nine-member committee set up by the Government of India on 14 August 1991. It was set up to examine all aspects relating to the structure, organisation, functions and procedures of the financial system. The Committee submitted its report to the Government on November 16, 1991. The report was tabled in the Parliament on December 17, 1991.
The first report of the Narsimham 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 Narsimham 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.
Read More: Recommendations of Narasimham Committee Report (1991)
Second Report by Narsimham Committee (1998)
The Narasimham Committee II was setup by the Finance Ministry of the Government of India under the chairmanship of Mr M. Narasimham in 1998. Committee submitted the report in April 1998. The main aim of the committee was to review the progress of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India.
The second report of the Narsimham 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 Narsimham 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.
Read More: Narasimham Committee on Banking Sector Reforms (1998)