The Narasimham Committee was established under former RBI Governor M. Narasimham in August 1991 to look into all aspects of the financial system in India. The report of this committee had comprehensive recommendations for financial sector reforms including the banking sector and capital markets. In broad acceptance to this committee, the government announced slew of reforms.
The key recommendations with respect to the banking sector were as follows:
- Reduction in the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR): The Narasimham Committee had recommended bringing down the statutory pre-emptions such as SLR and CRR. It recommended that SLR should be reduced to 25% over the period of time and CRR should be reduced to 10% over the period of time. When reduced these rations, bank would have more funds in their hands to deploy them in remunerative loan assets. The committee also recommended that banks should get some interest on the CRR balanced.
- Redefining the priority sector: The Narasimham Committee redefined the priority sector to include the marginal farmers, tiny sector, small business and transport sector, village and cottage industries etc. The committee also recommended that there should be a target of 10% of the aggregate credit fixed for the Priority Sector at least.
- Deregulation: The committee recommended deregulation of the Interest Rates, so that banks can themselves set the interest rates for their customers.
- It did an splendid work in Asset Classification, defining the Non Performing Assets (or bad debts) and recommendations towards transparency in the banking system
- It also recommended setting up tribunals for recovery of Loans, tackling doubtful debts, restructuring the banks and allowing entry of the new private Banks
Actions on recommendations of First Narasimham Committee
Many of the recommendations of the committee were acceded to by the government. The SLR , which was around 38.5% in 1991-1992 was brought down to some 28% in five years. The CRR was also brought down from 14% to 10% by 1997.
- The RBI introduced the CRAR or Capital to Risk Weighted Asset ratio in 1992 for the soundness of the banking industry. RBI also included new prudential reforms for classification of assets and provisioning of the non-performing assets.
- Some strong banks (such as SBI) were allowed to seek access to capital markets. The banks which were relatively weaker, were recapitalized by the government via budgetary support. More private banks were allowed. More freedom was given to banks to open branches. The RBI’s supervision system was strengthened. Rapid computerization of the banks was adopted. RBI started helping the commercial banks to improve the quality of their performance.
The government also enacted Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 Debt Recovery Tribunals with an Appellate Tribunal at Mumbai for quicker recovery of bad debts. In 1995, Banking Ombudsman scheme was launched with an objective to provide quicker solutions to customers’ complaints.