Banking Sector Reforms Narasimham Committee

The banking sector is the backbone for any economy to grow in today’s world. One of the most important banking sector reforms in India was proposed by the Narasimham Committee.

The Narasimham committee was headed by Mr. M Narasimham. It was formed twice, once in 1990 and the other in 1998. From 1980 onwards, India faced a lot of economic as well as banking crises; hence, this committee was formed to draw India out of the economic as well as banking crisis and make it one of the largest economies in the world.

Narasimham committee is related to India’s banking sector, and to make recommendations relating to the legislation and regulation to make it more effective, competitive and efficient in nature, for that, two such expert committees were set up under the chairmanship of Mr M Narasimham. 

Major recommendations of the 1990 Narasimham committee–

• To reduce the cash reserve ratio and statutory liquidity ratio. The cash reserve ratio was to be maintained at three to five per cent, and the statutory liquidity ratio was to be maintained at 25 per cent in a phased manner. This will help the commercial banks in giving more credit in the economy.

• To deregulate the interest rates of high loan amounts. According to a base rate and upper rate as per the market rates formation of asset reconstruction companies. 

• The formation of debt recovery tribunals for speedy decisions over the debt recovery issues.

• Giving more autonomy to the banks for smooth functioning of the banking sector in the country.

• To maintain the capital adequacy ratio at eight per cent. The capital adequacy ratio is the ratio of a bank’s total capital to its risk-weighted assets.

• The abolition of licensing to open new branches as well as new banks, if not fully abolition, then at least reducing the amount of licensing norms.

• The dual control or the regulation by both the Reserve bank of India as well as the ministry of finance of the Union of India to be reduced to the Reserve bank of India’s regulation.

Yet, in 1998, another committee under the chairmanship of Mr M Narasimham was appointed. The committee was set up to strengthen the financial institutions of the country. The committee was tasked with the progress review of the banking private sector reforms since 1992.

the major recommendations of the second Narasimham committee–

• Loans to be provided to less risky assets or the narrow concept of banking was to be done. It means loans must be given to the less risky parties only.

• Implementing universal banking, which is all other functions of the banks like investing advisory, mutual funds, insurance etc., should be implemented in the country.

• Making it mandatory to implement Basel norms and capital adequacy ratios in the banking sector.

• To merge  the strong public sector banks to increase competition and reduce the cost, and also in promoting the private banks in the country.

• To implement the core banking solutions and amend the necessary acts. According to the situation.

• The faster computerization and technological upgradation in order to move along with globalization.

• Training of staff in order to cope up with the changing situations and cope up with the current situation.

• The de-politicization of the banks is to reduce the political interference in the banking sector in India.

• Professionalism in banking, especially in the public sector banks, that is ethics of a profession and code of conduct should be implemented strictly in the public sector banking.

Conclusion- 

If you are interested in the Narasimham committee, then you should also become aware of the 2 reforms, namely AK Bhuchhar Committee and Urjit Patel Committee. These reforms, included with the Narasimham reform, brought about a lot of change in the banking sector regulations.