This committee was set up under the name of Narasimham, ex-RBI governor and the objective of the Narasimham Committee was to bring the banking sector reforms into shape and implement the ideas. The objective of the Narasimham Committee was to go through all the points which relate to the structure, organization, role, and the way of financial systems and they also give a suggestion that helps in improvement in productivity and makes it efficient.

This committee was led by Maidavolu Narasimham, who was the 13th governor of the Reserve Bank of India. There were 9 members of the Narasimham Committee. The 1st committee was held in 1991 and is called Narasimham Committee I and the 2nd committee was held in 1998 and is called Narasimham Committee II. It is an important baking sector reform that was introduced in 1991. 

Recommendations of the Narasimham Committee I

The objective of the 1st Narasimham Committee was growth in the banking sector and for that, the 9 members of the Narasimham committee made some important recommendations which are:

  1. The rate of Liquidity Statutory ratio is to be reduced.
  2. The capital adequacy ratio should reach 8%.
  3. The interest rates should be free from regulations.
  4. Building up a fund for asset reconstruction. 
  5. Disclosure of the accounts of the bank and categorizing the assets properly.
  6. A body to be introduced that will be a quasi-independent body and objective should be to handle banks and all the financial institutions. 
  7. A 4 tier hierarchy Indian banking system to be adopted in which 2 or 3 main public banks should be at the top of the system and the banks for rural development and the agricultural purpose should be at the bottom of the system. 

Recommendations of the Narasimham Committee II

The Narasimham Committee II is also called the banking sector committee as it followed an important banking reform that was introduced in 1991 which was Narasimham Committee I. The recommendations made by them are:

  1. Stronger banking system: The committee suggested that the public sector banks that are highlighted should merge or join each other which will in turn help in boosting trade in international countries. They also gave a warning for joining stronger banks with all the weaker banks.
  2. Narrow Banking: The committee introduced this concept and after this banks were given the permission to use their funds in assets for the short term and those which are free from risk because at that time banks invested in assets that gave them no return and they did not perform.
  3. Reform in the role of RBI: The committee laid down that as RBI is the only bank that regulates all other banks, RBI should not buy any bank or have ownership of any other bank.
  4. Government Ownership: The committee said that government ownership can lead to mismanagement and the banks having government ownership should be reviewed. 
  5. NPAs: The committee gave the decision of bringing down the rate of NPA to 3% before 2002. It was also said by the committee that we should build asset reconstruction companies and that was finally built in 2002.
  6. Capital Adequacy Ratio: The committee also proposed that the capital adequacy ratio’s norms should expand.
  7. Foreign banks: The previous capital that was required to start a foreign bank was $10 Million and then it was increased to $25 Million. 

Conclusion

The implementations of all the recommendations of the committee were not easy as they also faced criticism. The RBI union of employees had a very strong protest because of Narasimham committee II. The United Forum of Bank Unions called at least 1.3 million employees of the bank and held a meeting in Delhi to create an awareness program on the Narasimham Committee. The clear objective of the Narasimham Committee was to bring out the country from the crisis in the financial sector as banks were unable to perform.