Narasimham Committee (I & II)

The Narasimham Committee (I and II) refers to two landmark expert committees that laid the foundation for comprehensive banking and financial sector reforms in India. Chaired by M. Narasimham, a former Governor of the Reserve Bank of India, these committees played a transformative role in reshaping India’s banking system in line with efficiency, prudence and global best practices. Their recommendations fundamentally altered the structure, regulation and functioning of Indian banking, making them central to the study of banking, finance and the Indian economy.

Background and Economic Context

By the late 1980s, India’s banking system was characterised by high government intervention, weak profitability, low efficiency and growing non-performing assets. Banks were burdened with directed credit, administered interest rates and inadequate capital, which constrained their ability to support economic growth.
In the context of broader economic reforms initiated in the early 1990s, the Government of India constituted expert committees to review the financial system and recommend reforms. The first committee was set up in 1991, followed by a second committee in 1998, both chaired by M. Narasimham.

Narasimham Committee I (1991)

The Narasimham Committee I, formally known as the Committee on the Financial System, was constituted in 1991 to examine the structure and functioning of India’s financial system and suggest reforms to improve efficiency and stability.
The Committee emphasised the need to move away from a highly regulated and government-dominated banking system towards a market-oriented and competitive framework.

Key Recommendations of Narasimham Committee I

The major recommendations of the first committee included:

• Reduction in statutory pre-emptions such as the cash reserve ratio and statutory liquidity ratio to free resources for lending
• Deregulation of interest rates to reflect market conditions
• Introduction of prudential norms relating to income recognition, asset classification and provisioning
• Capital adequacy requirements in line with international standards
• Phased reduction of directed credit and rationalisation of priority sector lending
• Greater autonomy and accountability for public sector banks

These measures aimed to improve efficiency, transparency and financial discipline in banking operations.

Impact of Narasimham Committee I

The recommendations of the first committee marked a paradigm shift in Indian banking. Prudential norms brought transparency to bank balance sheets, revealing the true extent of non-performing assets. Interest rate deregulation improved resource allocation, while capital adequacy norms strengthened bank resilience.
These reforms aligned India’s banking system with international practices and prepared it to support a liberalising economy.

Narasimham Committee II (1998)

The Narasimham Committee II, also known as the Committee on Banking Sector Reforms, was constituted in 1998 to review the progress of earlier reforms and address emerging challenges such as rising competition, technological change and asset quality concerns.
The second committee focused more deeply on strengthening the banking system’s structure, governance and risk management.

Key Recommendations of Narasimham Committee II

The major recommendations of the second committee included:

• Strengthening capital adequacy and reducing government ownership in public sector banks
• Creation of strong banks through mergers and consolidation
• Greater emphasis on risk management, internal controls and supervision
• Reduction in non-performing assets through improved recovery mechanisms
• Adoption of international best practices in accounting, disclosure and supervision
• Limiting banks’ exposure to capital markets and sensitive sectors

These recommendations sought to make Indian banks globally competitive and resilient.

Role in Banking Sector Consolidation

One of the most significant contributions of Narasimham Committee II was its advocacy of consolidation in the banking sector. It argued for the creation of a smaller number of strong banks with global scale, alongside niche banks catering to specific segments.
This idea later influenced policies on bank mergers and restructuring in India.

Significance for Financial Stability

Both committees placed strong emphasis on prudential regulation and supervision. By introducing capital adequacy norms, asset classification standards and risk management frameworks, they strengthened the stability of the banking system.
These reforms reduced systemic vulnerabilities and enhanced the ability of banks to withstand economic shocks.

Impact on the Indian Economy

The Narasimham Committees fundamentally reshaped the relationship between banking and economic growth in India. A more efficient and competitive banking system improved credit allocation, supported industrial expansion and facilitated integration with global financial markets.
By strengthening financial intermediation, the reforms contributed to higher productivity, investment and long-term economic growth.

Criticisms and Challenges

Despite their success, the reforms faced criticism. Reduction in directed credit raised concerns about access to finance for vulnerable sectors, while autonomy for banks increased exposure to market risks.
Implementation challenges, particularly in public sector banks, persisted due to governance constraints and political considerations. However, these issues reflected transitional challenges rather than weaknesses in the reform framework.