There was a time when the banks of the country were not working properly during the Economic Liberation of India. That was the time when the country felt that there was a need for a properly working banking system for the development of the economy in the nation. This was the time when the Narasimham Committee was introduced. Follow the article to get adequate information about the Narasimham Committee.

The Narasimham Committee

The Narasimham Committee is an immensely powerful banking system reform that came into existence after independence. Both the financial system and the banking sector reforms of the Narasimham Committee have changed the functionality of every Indian bank in a very commendable way.

Two different committees were started by Maidavolu Narasimham when he was the chairperson. During that period there were reports and recommendations which were published. These recommendations have helped in unleashing the potential of the Indian bank. It has helped in minimizing the defects that come under the budgetary crisis that was held in 2007.

The recommendations given by the committee in the year 1991 are also mentioned below:

  • SLR and CRR Reductions: SLR refers to the Statutory Liquidity Ratio while CRR refers to the Cash Reserve Ratio. Before the implementation of the committee, the rates were extremely high up to 38.5% and 15% respectively. After the committee’s recommendations were taken into consideration both rates were decreased to 25% and 3-5% respectively.
  • Dual Control’s Removal: The Reserve Bank of India and the banking division of India are both functions under the Ministry of Finance. But the committee had been asked to only let the RBI regulate the whole sector of banking.

Recommendations of the Narasimham Committee 1998

The Narasimham recommendations given in the year 1998 are the second-generation reforms of the financial sector which were under Maidavolu Narasimham who at that time was the chairperson of the committee. He had also been the Governor of the RBI. This committee was supposed to give its report to the Finance Minister of India on the 20th of April 1998. It mainly concentrated on technological up-gradation and the strengthening of the banking sector’s main foundation. The major recommendations that were given in the 1998 Narasimham Committee have been given below:

  • The banks were also allowed to issue their bonds for the argumentation of their Tier-2 capital. Although, the guarantee of these bonds by the Indian Government was not considered a necessity.
  • The public sector banks had been allowed to recruit from the open banks or they can recruit just by the campus recruitments.
  • The Banks were said to take effective measures so that the reductions of the NPAs could be done and can also be put on where there the re-emergence of the NPAs can be prevented.
  • The committee has also suggested that to improve the banking systems of India the government must give in to raise the norms of Capital Adequacy. The target that was set by the committee was that the capital equity ratio should be 9% by the year 2010 and 10% by the year 2002.
  • The committee has also suggested that if the foreign banks are thinking of starting up their business in India, they should have a minimum start-up capital investment of about $25 million and there should be an existing amount of $10 million. 
  • There were the non-performing assets which were a noticeably big cause of problems in the sector of banking nonperforming of the first Narasimham committee; it was concluded that the reason using the probability of any of the commercial banks in the country was prioritized. So, the second Narasimham committee also has highlighted that there is zero need for nonprofitable assets for all the Indian banks concerning the international presence.

Conclusion

As has been mentioned above, The Narasimham Committee came into existence after the independence of the country. The committee was formed in the year 1991, as there were two committee recommendations that had taken place. During both times, the recommendations helped in unleashing the major potential of the banks in India. These have helped in the minimization of defects in the budgetary crisis that took place in the year 2007. The FAQs section supplies other information which will aid a better understanding of the topic.