Narasimham Committee

Introduction

• The banking reforms in India are mainly centered on Narasimham Committee- I and II recommendations. 
• The Narasimham Committee was formed with the goal of increasing efficiency, production, and profitability through “operational flexibility” and “functional autonomy.
• Narasimham Committee-I was set up in 1991 to study the problems of the Indian financial system and to suggest some recommendations for improvement in the efficiency and productivity of the financial institutions. 
• Narasimham Committee -II was set up in 1998 with the goal of launching the second wave of financial reforms. The second report of the Narasimham Committee focused on structural measures to strengthen and stabilise the financial system.

Narasimham Committee-I Recommendations

• Establishment of a four-tier banking structure, with SBI at the top, consisting of three to four large banks.
• Private sector banks should be treated equally with public sector banks. The ban on new private-sector banks should be eased, and the branch expansion license policy should be abolished. 
• From 1991-92 levels, the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should be gradually reduced. 
• Small and marginal farmers, the tiniest industrial sector, small traders, and the weaker sections should be included in the priority sector; the government’s share of public sector banks should be disinvested to a certain percentage; and interest rates should be deregulated to suit market conditions. 
• The government should be more liberal in allowing international bank branches to open, and Indian banks’ foreign operations should be streamlined; the RBI should be the major regulator of the country’s banking sector.

Narasimham Committee-II Recommendations

• Mergers between strong public sector banks, as well as the closure of smaller banks if rehabilitation is not viable. 
• The committee proposed creating an asset reconstruction fund to address the problem of public sector banks’ large non-performing assets (NPAs). 
• Competition between the public sector and private sector banks should be enhanced.  
• Formation of asset reconstruction fund to tackle the problem of huge non performing assets of public sector banks. 
• Capital adequacy requirements should be increased from their current level of 8%, although the number should not be specified. 
• The Banking Sector Reform Committee also stated that strong competition between public and private banks is necessary