Narasimham Committee

Banking and Insurance

The Presenting Committee

• Ashish Prabhu• Rohan Sadula• Priya Krishnamurthy• Ankush Poojari• Amar Chada• Amod Bhat

Why the Committee

• 1969- Banks Nationalization• Effects – Phenomenal increase in the geographical coverage

of our banking and financial institutions.– Despite impressive quantitative achievement- low

efficiency and productivity, bad portfolios performance, and eroded profitability.

– Several public sector banks and financial institutions were incurring losses year after year.

About the committee

• 1991 -RBI proposed the committee chaired by M. Narasimham, former RBI Governor to review the Financial System

• Review- aspects relating to the Structure, Organization, Procedures and Functioning of the financial system

About the committee

• Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector

• The Narasimham Committee laid the foundation for the reformation of the Indian banking sector

Problems faced then…• Higher rates of CRR(15%) and SLR(38.5%)

• Directed credit programs

• Political and Administrative interference

• Subsidizing of credit

• Mounting expenditures of banks

1991 1992 1993 1994

The Time Line

1st Narasimham Committee ReportIntroduction to Risk weighted capital adequacy norms and

prudential normsDeregulation of interest ratesBanking ombudsman scheme

1995 1996 1997 1998

The Time Line (Cont.)

Local Area Banks introducedFirst shared payment network2nd Narasimhan committee reportGuidelines on Risk management issued by RBI

Major Recommendations

• Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years

• Progressive reduction in Cash Reserve Ratio (CRR) to 3-5%

• Phasing out direct credit programs and redefining the priority sector

• Setting the capital adequacy ratio (CAR) to 8 percent by March 1996

Major Recommendations

• Opening of More Pvt. sector banks • Motivation foreign banks to expand their

network by opening new branches• Deregulation of RBI and Finance ministry of

India. Making RBI as a regulator of all Banks and let Banks takes participation in equity market with govt. stake of 51%

• Other Regulation introduced by RBI include Asset classification ,NPA ratio

Major Recommendations (cont.)

• Corporate Governance : promoting customer relations and office culture

• Asset Reconstruction for bringing down NPA in future

• Risk Management • CDR • E-Banking and VRS

Narasimham Committee 2

• Review –Progress of banking sector reforms to

date

–Financial sector reforms to strengthen India's financial system and make it internationally competitive

Major Recommendations

• Need for stronger banking system

• Experiment with concept of narrow banking

• Small local banks

• Capital Adequacy Ratio

• Review and update banking laws.

Emergence of 9 new private sector banks

Opening up of vibrant capital market

Great impact on banks’ balance sheets both on assets and liabilities side

The Effect

• Deposit interest rate• Increase in capital Adequacy

requirementLiability Side

• Reforms on Lending rate• Lower CRR and SLR• IRAC norms

Asset Side

• Structural Reforms• Entry to new business lines

Other Reforms

The Effect (Cont.)

Some Facts…

• Nationalization of banks in 1969: 14 banks were nationalized

• Branch expansion: Increased from 8260 in 1969 to 71177 in 2006

• Population served per branch has come down from 64000 to 16000

• A rural branch office serves 15 to 25 villages within a radius of 16 kms

• However, at present only 32,180 villages out of 5 lakh have been covered

Some Facts…

• Deposit mobilization– 1951-1971 (20 years)- 700% or 7 times– 1971-1991 (20 years)- 3260% or 32.6 times– 1991- 2006 (11 years)- 1100% or 11 times

• Expansion of bank credit: Growing at 20-30% p.a. thanks to rapid growth in industrial and agricultural output

• Development oriented banking: priority sector lending

Some Facts…

• Diversification in banking: Banking has moved from deposit and lending to– Merchant banking and underwriting– Mutual funds– Retail banking– ATMs– Internet banking– Venture capital funds– Factoring

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