Narasimham Committee-II (1997) Banking Sector Reforms Committee


In 1998 the government appointed a committee under the chairmanship of Mr. Narsimham.

It is better known as the Banking Sector Committee.

Its aim was to review the progress of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India.

 

Recommendations of Narasimham Committee II (1997)—

[1] The committee considered the stronger banking system in the context of the Current Account Convertibility ‘CAC’.

[2] The committee recommended a review of functions of boards and enabled them to adopt professional corporate strategy.

[3] The committee recommended the merger of strong banks which will have ‘multiplier effect’ on the industry.

[4] The committee recommended ‘Narrow Banking Concept’ where weak banks will be allowed to place their funds only in short term and risk free assets.

[5] The committee recommended that the Government should raise the prescribed capital adequacy norms.

[6] Foreign exchange open credit limit risks should be integrated into the calculation of risk weighted assets and should carry a 100 per cent risk weight.

[7] The committee recommended Government of India equity in nationalized banks be reduced to 33% for increased autonomy.

[8] The Committee proposed a segregation of the roles of RBI as a regulator of banks and owner of bank. It highlighted that RBI’s role of effective supervision was not adequate and wanted it to divest its holdings in banks and financial institutions.

[9] RBI should totally withdraw from the primary market in 91 days Treasury Bills.

[10] The committee suggested that the foreign banks seeking to set up business in India should have a minimum start-up capital of $25 million as against the existing requirement of $10 million.

[11] Committee recommended creation of Asset Reconstruction Funds or Asset Reconstruction Companies to take over the bad debts of banks, allowing them to start on a clean-slate.

[12] Inter-bank call and notice money market and inter-bank term money market should be strictly restricted to banks; only exception to be made is primary dealers.

 

Implementation—

To implement these recommendations, the RBI in Oct 1998, initiated the second phase of financial sector reforms.

RBI raised Capital Adequacy Ratio by 1%.

RBI targeted to bring the capital adequacy ratio to 9% by March 2001.

Based on the other recommendations of the committee, the concept of a universal bank was discussed by the RBI and finally ICICI bank became the first universal bank of India.

The mid-term Review of the Monetary and Credit Policy of RBI was announced.