Narasimhan Committee

From the 1991 India economic crisis to its status of third largest economy in the world by 2011, India has grown significantly in terms of economic development, so has its banking sector. During this period, recognizing the evolving needs of the sector, the Finance Ministry of the Government of India set up various committees with the task of analyzing India’s banking sector and recommending legislation and regulations to make it more effective, competitive and efficient.

Two such expert Committees were set up under the chairmanship of Maidavolu Narasimham. They submitted their recommendations in the 1990s in reports widely known as the Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998) Report. These recommendations not only helped unleash the potential of banking in India, they are also recognized as a factor towards minimizing the impact of global financial crisis starting in 2007.

Unlike the dirigist era up until the mid-1980s, India is no longer insulated from the global economy. The banks in India survived the 2008 financial crisis relatively unscathed, a feat due in part to these Narasimham Committees.

The major recommendations submitted by the Committee were:

• Stronger banking system: The Committee recommended the merger of major public sector banks to boost international trade. However, the Committee warned against merging stronger banks with weaker banks.
• Narrow Banking: Some of the public sector banks at that time had the problem of high non-performing assets (NPAs). For successful rehabilitation of such banks, the Committee recommended Narrow Banking Concept where the banks were allowed to put their funds in short-term and risk-free assets.
• Reform in the role of RBI: The Committee also recommended reforms in the role of the RBI in the banking sector. The Committee felt that RBI being the regulator, it should not have ownership in any bank.
• Government ownership: It also recommended that government ownership of banks should be reviewed as it hampers the autonomy of banks resulting in mismanagement.
• NPAs: The Committee wanted the banks to reduce their NPAs to 3% by 2002. It also recommended the formation of Asset Reconstruction Funds or Asset Reconstruction Companies. The recommendations led to the introduction of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
• Capital Adequacy Ratio: It also proposed that the government should raise the Capital Adequacy Ratio norms.
• Foreign banks: It also proposed to raise the minimum start-up capital to $25 million for foreign banks from $10 million.

Criticism

There were protests by employee unions of banks in India against the report. The Union of RBI employees made a strong protest against the Narasimham II Report. There were other plans by the United Forum of Bank Unions (UFBU), representing about 1.3 million bank employees in India, to meet in Delhi and to work out a plan of action in the wake of the Narasimham Committee report on banking reforms. The committee was also criticized in some quarters as “anti-poor”. According to some, the committees failed to recommend measures for faster alleviation of poverty in India by generating new employment. This caused some suffering to small borrowers (both individuals and businesses in tiny, micro and small sectors).

Reception

Initially, the recommendations were well received in all quarters, including the Planning Commission of India leading to successful implementation of most of its recommendations. During the financial crisis of 2007–2008, performance of the Indian banking sector was far better than its international counterparts. This was also credited to the successful implementation of the recommendations of the Narasimham Committee-II with particular reference to the capital adequacy norms and the re-capitalization of the public sector banks. The impact of the two committees has been so significant that elite politicians and financial sectors professionals have been discussing these reports for more than a decade since their first submission applauding their positive contribution