First Narasimhan Committee Report – 1991
Recommendations
of Narasimhan Committee
1. Establishment of 4 tier hierarchy for
banking structure with 3 to 4 large banks (including SBI) at the top and at
bottom rural banks engaged in agricultural activities.
2. The
supervisory functions over banks and financial institutions can be assigned to a quasi-autonomous body
sponsored by RBI.
3. A
phased reduction
in SLR & CRR.
4. Phased
achievement of 8%
capital adequacy ratio.
5. Abolition
of branch licensing
policy.
6. Proper classification of assets
and full
disclosure of accounts of banks and financial institutions.
7. Deregulation of Interest rates.
8. Competition
among financial institutions on participating approach.
Banking Reform Measures of
Government: –
On the
recommendations of Narasimhan Committee, following measures were undertaken by
government since 1991:
–
1. Lowering SLR and CRR
·
The
high SLR and CRR reduced the profits
of the banks. The SLR had
been reduced from 38.5% in 1991 to 25% in 1997.
·
The
Cash Reserve Ratio (CRR) is the cash ratio of banks total deposits to be
maintained with RBI. The
CRR had been brought down from 15% in 1991 to 4.1% in June 2003.
2. Prudential Norms: –
·
Prudential
norms have been started by RBI in order to impart professionalism in commercial
banks. The purpose
of prudential norms includes proper disclosure of income, classification of
assets and provision for Bad debts so as to ensure that the books of commercial
banks reflect the accurate and correct picture of financial position.
·
Prudential
norms required banks to make 100%
provision for all Non-performing Assets (NPAs).
3. Capital
Adequacy Norms (CAN): –
·
Capital
Adequacy ratio is the ratio of minimum capital to risk asset ratio. In April
1992 RBI fixed CAN at 8%. By March 1996, all public sector banks had attained
the ratio of 8%. It was also attained by foreign banks.
4. Deregulation of Interest Rates
·
The
Narasimhan Committee advocated that interest rates should be allowed to be
determined by market
forces. Since 1992, interest rates have become much simpler and freer.
·
Scheduled
Commercial banks have now the freedom to set interest rates on their deposits
subject to minimum floor rates and maximum ceiling rates.
·
The
interest rate on domestic
term deposits has been decontrolled.
·
The
interest rates on deposits and advances of all Co-operative banks have been
deregulated subject to a minimum lending rate.
5. Recovery of Debts
·
The
Government of India passed the “Recovery of debts due to Banks and Financial Institutions Act 1993”
in order to facilitate and speed up the recovery of debts due to banks and
financial institutions. Six Special Recovery Tribunals have been set up. An
Appellate Tribunal has also been set up in Mumbai.
6. Competition from New Private
Sector Banks
·
Banking
is open to the private sector.
·
New
private sector banks have already started functioning. These new private sector
banks are allowed to raise capital contribution from foreign institutional
investors up to 20% and from NRIs up to 40%. This has led to increased
competition.
7. Access To Capital Market
·
The Banking Companies (Acquisition and
Transfer of Undertakings) Act
was amended to enable the banks to raise capital through public issues. This is
subject to the provision that the holding of Central Government would not fall
below 51% of paid-up-capital.
8. Freedom
of Operation
·
Scheduled
Commercial Banks are given freedom to open new branches and upgrade extension
counters, after attaining capital adequacy ratio and prudential accounting
norms. The banks are also permitted to close non-viable branches other than in
rural areas.
9. Local Area Banks (LABs)
·
In
1996, RBI issued guidelines for setting up of Local Area Banks, and it gave Its
approval for setting up of 7 LABs in private sector. LABs will help in
mobilizing rural savings and in channelling them into investment in local
areas.
10. Supervision of Commercial Banks
·
The
RBI has set up a Board of
financial Supervision with an advisory Council to strengthen the
supervision of banks and financial institutions. In 1993, RBI established a new
department known as Department
of Supervision as an independent unit for supervision of commercial
banks.
