NARASIMHAM COMMITTEE RECOMMENDATION
INTRODUCTION
• India had witnessed a phenomenon expansion in geographical coverage and functional spread of our banking and financial system since bank nationalized in1969.Inspite of impressive achievements in resource mobilization and extending credit reach several distortion had occurred. Has a result productivity and efficiency of the system had suffered. It was under these circumstances that the government of India set upped a high level committee with Mr. M Narasimham, a former governor of the Reserve bank of India as chairman to examine all expects relating to the structure ,organizations functions and procedures of the financial system..
Why the committee?
– 1969- Banks Nationalization ‡ Effects – Phenomenal increase in the geographical coverage of 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 – the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector – T he 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
• Gov apponted Narasimham committee to make recommendation in respect to following aspects: • Improving efficiency & effectiveness of financial systemspecial reference to operations, accountability & profitability • Greater competition – to respond more effectively for credit needs • Ensure effective supervision
• The committee was also required to review the existing legislative framework & to suggest necessary amendments for implementing recommendations
BASIC APPROACH OF THE COMMITTEE
• The Narasimham committee was primarily interested in improving the financhial health of public sector banks and development financhial institutions so as to make them viable and efficient and meet the emerging needs of the real economy. ? Massive branch expansion particularly in rural areas . ? Expansion in the volume of deposits=bank deposits. ? Rural penetration of the banking system =rural deposits as a proportion of total deposits had increased from 3%to 15%.
? Diversion of an increasing portion of the credit to priority sector.
RECOMMENDATIONS OF THE NARASIMHAM COMMITTEEE
The Narsimham committee’ recommendations were based on the fundamental assumption that the resources of the banks come from the general public and were held by the banks in trust and that they were to be deployed for maximum benefit of the depositors. This assumption automatically implied that even the government have no business to endanger the solvency, health and efficiency of the nationalized banks .
ON DIRECT INVESTMENT
• The Narasimham committee 1991 gave two important recommendations.. 1. Statutory liquidity ratio. 2. Cash reserve ratio. Statutory liquidity ratio::: (A). The govt should give up the using of SLR as Major instrument of mobilizing funds for the govt and public institution. ( B)Slur should be reduced to 25% Cash reserve ratio: RBI was using CRR as instrument of monetary and credit control. But committee recommended that RBI should rely on the open market instrument . CRR should reduced to 5%. These recommendations would reduce the idle cash balances kept by the banks’
ONDIRECT CREDIT PROGRAMMES
• The Narasimham committee recommended that system of directed credit programs should be gradually phased out. • On directed Credit should not be the regular program. but should be in the extra ordinary support to weaker section of economy. • the committee also proposed that the concept of priority sector should be redefined.
ON THE STRUCTURE OF INTEREST RATES
•
The N Narasimham committee 1991 recommended that level and structure of interest rates in the economy should be broadly determined by the market forces. • All control and regulations interest rates on lending and deposit rates of bank and financial institution on debentures and company deposit should be removed.
ON THE STRUCTURAL RE ORGANIZATION OF BANKING STRUCTURE
• Reduction in the no of public sector banks through merger and acquisition. . Demolition of bank licensing. 3 or 4 large banks which could become international in character. Branches with the objective of spreading banking habits should be discontinued. • Banks should have the freedom to open the branches purely on profitability consideration. Govt should allow foreign banks to open a offices in India.
Other recommendations
• Setting up of Asset Reconstruction Fund
doc_198176012.pptx
INTRODUCTION
• India had witnessed a phenomenon expansion in geographical coverage and functional spread of our banking and financial system since bank nationalized in1969.Inspite of impressive achievements in resource mobilization and extending credit reach several distortion had occurred. Has a result productivity and efficiency of the system had suffered. It was under these circumstances that the government of India set upped a high level committee with Mr. M Narasimham, a former governor of the Reserve bank of India as chairman to examine all expects relating to the structure ,organizations functions and procedures of the financial system..
Why the committee?
– 1969- Banks Nationalization ‡ Effects – Phenomenal increase in the geographical coverage of 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 – the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector – T he 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
• Gov apponted Narasimham committee to make recommendation in respect to following aspects: • Improving efficiency & effectiveness of financial systemspecial reference to operations, accountability & profitability • Greater competition – to respond more effectively for credit needs • Ensure effective supervision
• The committee was also required to review the existing legislative framework & to suggest necessary amendments for implementing recommendations
BASIC APPROACH OF THE COMMITTEE
• The Narasimham committee was primarily interested in improving the financhial health of public sector banks and development financhial institutions so as to make them viable and efficient and meet the emerging needs of the real economy. ? Massive branch expansion particularly in rural areas . ? Expansion in the volume of deposits=bank deposits. ? Rural penetration of the banking system =rural deposits as a proportion of total deposits had increased from 3%to 15%.
? Diversion of an increasing portion of the credit to priority sector.
RECOMMENDATIONS OF THE NARASIMHAM COMMITTEEE
The Narsimham committee’ recommendations were based on the fundamental assumption that the resources of the banks come from the general public and were held by the banks in trust and that they were to be deployed for maximum benefit of the depositors. This assumption automatically implied that even the government have no business to endanger the solvency, health and efficiency of the nationalized banks .
ON DIRECT INVESTMENT
• The Narasimham committee 1991 gave two important recommendations.. 1. Statutory liquidity ratio. 2. Cash reserve ratio. Statutory liquidity ratio::: (A). The govt should give up the using of SLR as Major instrument of mobilizing funds for the govt and public institution. ( B)Slur should be reduced to 25% Cash reserve ratio: RBI was using CRR as instrument of monetary and credit control. But committee recommended that RBI should rely on the open market instrument . CRR should reduced to 5%. These recommendations would reduce the idle cash balances kept by the banks’
ONDIRECT CREDIT PROGRAMMES
• The Narasimham committee recommended that system of directed credit programs should be gradually phased out. • On directed Credit should not be the regular program. but should be in the extra ordinary support to weaker section of economy. • the committee also proposed that the concept of priority sector should be redefined.
ON THE STRUCTURE OF INTEREST RATES
•
The N Narasimham committee 1991 recommended that level and structure of interest rates in the economy should be broadly determined by the market forces. • All control and regulations interest rates on lending and deposit rates of bank and financial institution on debentures and company deposit should be removed.
ON THE STRUCTURAL RE ORGANIZATION OF BANKING STRUCTURE
• Reduction in the no of public sector banks through merger and acquisition. . Demolition of bank licensing. 3 or 4 large banks which could become international in character. Branches with the objective of spreading banking habits should be discontinued. • Banks should have the freedom to open the branches purely on profitability consideration. Govt should allow foreign banks to open a offices in India.
Other recommendations
• Setting up of Asset Reconstruction Fund
doc_198176012.pptx