Narasimham Committee on Financial Reforms

Narasimham Committee I and II became the backbone of our country’s economic and financial sector. Mr M Narasimham was the thirteenth governor of RBI. The committee was set to analyze all the factors related to the financial sectors and give recommendations for its improvement. The Narasimham committee not only recommended but also talked about implementing the recommendations and their long term outcomes. During that period, the finance sector of India was on the edge of deterioration when the committee was formed. It mainly focused on improving and strengthening the banking sectors to improve the financial sectors of India. 

Financial Sector Reforms

Financial sector reform aims to initiate an efficient financial system to improve the allocative efficiency of resources and protect and stabilize the financial system. The financial sector primarily trades with financial services. It comprises the banking, capital and insurance sector. The financial sector connects savers and borrowers. It plays a crucial role in stabilizing the economy of a country. The financial sector is the backbone of any economy and mobilizes the allocation of resources. The main constituents of financial sectors are:

• Bank
• Markets
• Financial institutions 
• Financial instruments like stocks, bonds, option contracts, etc. 

A  financial institution can be of four types, namely:

• Commercial banks
• Brokerage firms
• Insurance companies
• Investment banks

All the constituents of the financial sector play an important role in the economy’s evolution. The accumulation of capital through the constituents of the financial sector fosters economic growth. Financial sector reforms deal with policy formulation to better the operational efficiency of each constituent of financial sectors. 

Narasimhan committee and financial sector reforms in India

In India, financial sector reform is a part of a broad structural adjustment programme launched to deal with the serious balance of payments or BOP. BOP is the accounting of a country’s international transaction for a particular period. Any transaction that causes the inflow of money to a country is a credit to its BOP account, while when there is an outflow of money, it is debited to its BOP account. Although BOP triggered the reform immediately, it also helped reform the repressed financial sectors in many ways.

The first committee was set in 1991 under the chairmanship of Maidavolu Narasimham, the thirteenth governor of the Reserve Bank of India or RBI. The first Narasimham committee focused mainly on the growth of the banking sector. The major recommendation of the Narasimham Committee was:

• Deregulation of the interest rates
• The setting of asset reconstruction funds
• Holding out to 8% capital adequacy ratio
• Full disclosure of banking accounts and proper classification of the assets
• Introducing a quasi-autonomous body under RBI for the supervision of financial institutions
• There is a need of  4-tier hierarchy for the Indian banking system, with rural bank development supporting agricultural activities at the bottom and 3-4 major public sector banks at the top. 

The Narasimham committee II  was held in 1998 under P. Chidambaram as finance minister headed by Maidavolu Narasimham. This committee is also known as the banking sector committee, and the major task was the implementation of suggestions and reforms for strengthening the sector. The major recommendations of the committee were:

• Narrow banking, which allowed the banks to invest their funds in short-term and risk-free assets
• To increase the capital adequacy ratio
• Reducing the NPA’s to 3% by 2002
• Reforming the role of RBI, the committee felt that RBI  should not have ownership in any bank.
• Government should review its ownership of the bank as it hampers its autonomy and causes mismanagement.
• Stronger banking system by merging public sector banks to improve international trade

Impact of Financial Sector Reforms in India

The Narasimham committee gave major recommendations which were far ahead of their time and had a great impact in improving the financial sector of our country. The outcomes themselves briefly explain the financial sector reforms. Some of the major impacts are listed below:

•  Most of the recommendations were received and successfully implemented 
• During the 2008 economic crisis, the performance of the Indian banking sectors was better than their international counterparts.
• Capital adequacy norms and recapitalisation of the public sector banks contributed greatly to improving economic performance.
• The positive contributions of the Narasimham committee are still benefitting the financial sector.

Conclusion

The Narasimham committees have favored the creation of integrated infrastructures. The reform sectors were restructured, giving great outcomes. The implementation of both the Narasimham committee was taken seriously. The committee’s recommendation led to the formation of new legislation by 2002, Securitisation and Reconstruction of the financial assets and enforcement of security interest act, 2002. It gave the banks full authority to auction the properties and assets of defaulters to recover the loan amount. Some of the committee’s recommendations are still waiting to follow through with the government and implementations like reducing government’s equity to thirty-three per cent