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{{Short description|Indian government committees on the banking system}}
{{EngvarB}}
{{Use dmy dates}}

From the [[1991 India economic crisis]] to its status of [[List of countries by GDP (PPP)|third largest economy in the world]] by 2011, India has grown significantly in terms of economic development, so has its [[banking in India|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.<ref name="PMPIB">{{cite news
| title = Prime Minister's address at RBI Platinum Jubilee Celebrations
| url = http://pib.nic.in/newsite/erelease.aspx?relid=60027
| work = Press Information Bureau, Government of India
| date = 1 April 2010
| access-date = 22 February 2011
}}</ref>

Two such expert Committees were set up under the chairmanship of '''[[M. Narasimham|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 [[Financial crisis of 2007–2008|global financial crisis starting in 2007]].

Unlike the [[Dirigisme|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''.<ref name="Hindu2">{{cite web|url=http://www.thehindubusinessline.in/2008/10/13/stories/2008101350900900.htm |title=Kudos in order, as also more work", Oct13,2008 |work=Business Line |access-date=2011-02-19}}</ref>

==Background==
During the decades of the 60s and the 70s, India [[Banking in India#Nationalisation|nationalised]] most of its banks. This culminated with the [[1991 India economic crisis|balance of payments crisis]] of the [[economy of India|Indian economy]] where India had to airlift gold to [[International Monetary Fund]] (IMF) to loan money to meet its financial obligations. This event called into question the previous banking policies of India and triggered the era of [[economic liberalisation in India|economic liberalization in India]] in 1991.

Given the rigidities and weaknesses had made serious inroads into the Indian banking system by the late 1980s, the [[Government of India]], post-crisis, took several steps to remodel the country's financial system.<ref name="BLSDN">{{cite news
| title = Financial reforms and development
| url = http://www.thehindubusinessline.in/2002/04/26/stories/2002042600060800.htm
| work = S.D.Naik, Business Line, the Hindu
| date = 26 April 2002
| access-date = 22 February 2011
}}</ref> The banking sector, handling 80% of the flow of money in the economy, needed serious reforms to make it internationally reputable, accelerate the pace of reforms and develop it into a constructive usher of an efficient, vibrant and competitive economy by adequately supporting the country's financial needs.<ref name="Frontline">
{{cite news
| title = BANKING REFORMS, <br />Radical prescriptions
| url = http://www.hinduonnet.com/fline/fl1510/15101090.htm
| work = SUDHA MAHALINGAM, Frontline Vol. 15 :: No. 10
| date = 9–22 May 1998
| access-date = 21 February 2011
| archive-url = https://web.archive.org/web/20081024220946/http://www.hinduonnet.com/fline/fl1510/15101090.htm
| archive-date = 24 October 2008
| url-status = usurped
}}
</ref>

In the light of these requirements, two expert Committees were set up in 1990s under the chairmanship of [[M. Narasimham]], former [[Reserve Bank of India]] governor which are widely credited for spearheading the financial sector reform in India.<ref name="BLSDN" />

The first Narasimhan Committee '''(Committee on the Financial System – CFS)''' was appointed by [[Manmohan Singh]] as India's [[Finance Minister]] on 14 August 1991,<ref name="PMPIB" /><ref name="SN92">{{cite book|author1=India. Committee on the Financial System|author2=M. Narasimham|title=Narasimham Committee report on the financial system, 1991|url=https://books.google.com/books?id=h5qaAAAAIAAJ|access-date=23 February 2011|year=1992|publisher=Standard Book Co.}}</ref> and the second one ('''Committee on [[Banking system|Banking Sector]] Reforms''')<ref name="JainKhanna">{{cite book|author1=TR Jain|author2=OP Khanna|title=Macroeconomics|url=https://books.google.com/books?id=aGypjQ8zMYsC&pg=PA345|access-date=23 February 2011|publisher=FK Publications|isbn=978-81-87140-65-8|pages=345–}}</ref> was appointed by [[P.Chidambaram]]<ref>{{cite news
| title = Financial sector reforms – an assessment
| url = http://www.expressindia.com/fe/daily/19971230/36455263.html
| work = Sudha Sharma, Expressindia.com
| date = 30 December 1997
| access-date = 23 February 2011
}}</ref> as Finance Minister in December 1997.<ref name="IT">
{{cite news
| title = Make the Buck Stop
| url = http://www.india-today.com/itoday/20001211/chid.shtml
| work = India Today, on the net
| date = 11 December 2000
| access-date = 21 February 2011
| archive-url = https://web.archive.org/web/20101124121043/http://india-today.com/itoday/20001211/chid.shtml
| archive-date = 24 November 2010
| url-status = dead
}}
</ref> Subsequently, the first one widely came to be known as the '''Narasimham Committee-I (1991)''' and the second one as '''Narasimham-II Committee(1998)'''.<ref name="Kalyan">{{cite web|url=http://kalyan-city.blogspot.com/2010/09/narasimham-committee-report-1991-1998.html |title=Narasimham Committee Report 1991 1998 – Recommendations |publisher=Gaurav Akrani |access-date=2011-02-19}}</ref><ref name="Vidya">{{cite web |url=http://dspace.vidyanidhi.org.in:8080/dspace/bitstream/2009/3045/9/UOM-2001-1757-8.pdf |title=Vidyanidhi Document |access-date=2011-02-19 |url-status=dead |archive-url=https://web.archive.org/web/20110721180839/http://dspace.vidyanidhi.org.in:8080/dspace/bitstream/2009/3045/9/UOM-2001-1757-8.pdf |archive-date=21 July 2011 }}</ref>

The purpose of the Narasimham-I Committee was to study all aspects relating to the structure, organisation, functions and procedures of the financial systems and to recommend improvements in their efficiency and productivity. The Committee submitted its report to the Finance Minister in November 1991 which was tabled in Parliament on 17 December 1991.<ref name="JainKhanna"/>

The Narasimham-II Committee was tasked with the progress review of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India.<ref name="Frontline"/> It focussed on issues like size of banks and [[capital adequacy ratio]] among other things.<ref name="Kalyan"/> M. Narasimham, chairman, submitted the report of the ''Committee on Banking Sector Reforms (Committee-II)'' to the [[Minister of Finance (India)|Finance Minister]] [[Yashwant Sinha]] in April 1998.<ref name = "Frontline"/><ref name="Kalyan"/>

==Recommendations of the Committee==
The 1998 report of the committee to the GOI made the following major recommendations:

=== Autonomy in Banking ===
Greater autonomy was proposed for the [[Public-sector undertaking|public sector]] banks in order for them to function with equivalent professionalism as their international counterparts.<ref name="rbidocs.rbi.org.in">https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/24157.pdf {{Bare URL PDF}}</ref> For this the panel recommended that recruitment procedures, training and remuneration policies of public sector banks be brought in line with the best-market-practices of professional banking systems. It also recommended the RBI relinquish its seats on the board of directors of these banks. The committee further added that given that the government nominees to the board of banks are often [[Parliament of India|members of parliament]], politicians, bureaucrats, etc., they often interfere in the day-to-day operations of the bank in the form of the ''behest-lending''.<ref name = "Frontline"/> As such the committee recommended a review of functions of banks boards with a view to make them responsible for enhancing shareholder value through formulation of corporate strategy and reduction of the government equity.<ref name="rbidocs.rbi.org.in"/>

To implement this, criteria for ''autonomous status'' was identified by March 1999 (among other implementation measures) and 17 banks were considered eligible for autonomy.<ref name="BNI">{{cite web|author=anurag |url=http://www.banknetindia.com/banking/rbip3a.htm |title=Banking Sector Reforms 1999–2000 |publisher=Banknetindia.com |access-date=2011-02-19}}</ref> But some recommendations like reduction in Government's equity to 33%,<ref name="Hindu4">{{cite web |title=Now Govt has to top up funds banks need to grow |url=http://www.thehindubusinessline.in/2004/05/21/stories/2004052101980800.htm |access-date=2011-02-19 |work=Business Line}}</ref><ref name="TET">{{cite news
| title = Business houses can set up banks
| url = http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/business-houses-can-set-up-banks/articleshow/1948997.cms
| work = The Economic Times
| date = 2 September 2006
| access-date = 21 February 2011
}}</ref> the issue of greater professionalism and independence of the board of directors of public sector banks is still awaiting Government follow-through and implementation.<ref name="THBL">{{cite news
| title = Budget and banking reforms
| url = http://www.thehindubusinessline.in/2010/03/05/stories/2010030550730800.htm
| work = K. KANAGASABAPATHY, BusinessLine, Business Daily from THE HINDU group of publications
| date = 5 March 2010
| access-date = 23 February 2011
}}</ref>

=== Reform in the role of RBI ===
First, the committee recommended that the RBI withdraw from the 91-day treasury bills market and that interbank call money and term money markets be restricted to banks and primary dealers.<ref name="JainKhanna"/><ref name="BNI"/> Second, the Committee proposed a segregation of the roles of RBI as a ''regulator'' of banks and ''owner'' of bank.<ref name = "IE4">{{cite web|url=http://www.expressindia.com/fe/daily/19980818/23055344.html |title=Nip state-run banks stake below 51%, Centre told |work=The Indian Express |access-date=2011-02-19}}</ref> It observed that ''"The Reserve Bank as a regulator of the monetary system should not be the owner of a bank in view of a possible conflict of interest"''. As such, it highlighted that RBI's role of effective supervision was not adequate and wanted it to divest its holdings in banks and financial institutions.

Pursuant to the recommendations, the RBI introduced a [[Liquidity Adjustment Facility]] (LAF) operated through repo and reverse repos to set a corridor for money market interest rates. To begin with, in April 1999, an Interim Liquidity Adjustment Facility (ILAF) was introduced pending further upgradation in technology and legal/procedural changes to facilitate electronic transfer.<ref name = "IE3">{{cite web|url=http://www.expressindia.com/fe/daily/20000428/fec28083.html |title=Text of the monetary and credit policy 2000–01|work=The Indian Express |access-date=2011-02-19}}</ref> As for the second recommendation, the RBI decided to transfer its respective shareholdings of public banks like [[State Bank of India]] (SBI), [[National Housing Bank]] (NHB) and [[National Bank for Agriculture and Rural Development]] (NABARD) to GOI. Subsequently, in 2007–08, GOI decided to acquire entire stake of RBI in SBI, NHB and NABARD. Of these, the terms of sale for SBI were finalised in 2007–08 itself.<ref name="RBISBI">{{cite news
| title = Government acquires entire RBI shareholding in SBI
| url = http://pib.nic.in/newsite/erelease.aspx?relid=28897
| work = Press Information Bureau, Government of India
| date = 29 June 2007
| access-date = 23 February 2011
}}</ref>

=== Stronger banking system ===
The Committee recommended for merger of large Indian banks to make them strong enough for supporting international trade.<ref name="rbidocs.rbi.org.in"/> It recommended a three tier banking structure in India through establishment of three large banks with international presence, eight to ten national banks and a ''large number of regional and local banks''.<ref name = "Frontline"/><ref name = "Kalyan"/> This proposal had been severely criticized by the RBI employees [[trade union|union]].<ref name="RBI union">{{cite web |url=http://www.indianexpress.com/fe/daily/19980425/11555314.html |title=RBI Union's protest article |work=The Indian Express |access-date=2011-02-19 }}{{dead link|bot=InternetArchiveBot |fix-attempted=yes }}</ref> The Committee recommended the use of mergers to build the size and strength of operations for each bank.<ref name="Hindu3">{{cite web|url=http://www.thehindubusinessline.in/2010/01/29/stories/2010012951380800.htm |title=Going ahead with bank mergers|work=Business Line |access-date=2011-02-19}}</ref> However, it cautioned that large banks should merge only with banks of equivalent size and not with weaker banks, which should be closed down if unable to revitalize themselves.<ref name="JainKhanna"/> Given the large percentage of [[non-performing asset]]s for weaker banks, some as high as 20% of their total assets, the concept of "narrow banking" was proposed to assist in their rehabilitation.<ref name="rbidocs.rbi.org.in"/>

There were a string of mergers in banks of India during the late 90s and early 2000s, encouraged strongly by the Government of India in line with the committee's recommendations.<ref name="Hindu">{{cite web|url=http://www.thehindubusinessline.in/2004/08/29/stories/2004082901610100.htm |title=Govt favors consolidation in banks |work=Business Line |access-date=2011-02-19}}</ref> However, the recommended degree of consolidation is still awaiting sufficient government impetus.<ref name="THBL"/>

=== Non-performing assets ===
Non-performing assets had been the single largest cause of irritation of the banking sector of India.<ref name="Frontline"/> Earlier the Narasimham Committee-I had broadly concluded that the main reason for the reduced profitability of the commercial banks in India was the priority sector lending. The committee had highlighted that 'priority sector lending' was leading to the buildup of non-performing assets of the banks and thus it recommended it to be phased out.<ref name = "Vidya"/> Subsequently, the Narasimham Committee-II also highlighted the need for 'zero' non-performing assets for all Indian banks with International presence.<ref name = "Vidya"/> The 1998 report further blamed poor credit decisions, behest-lending and cyclical economic factors among other reasons for the buildup of the non-performing assets of these banks to uncomfortably high levels. The Committee recommended creation of Asset Reconstruction Funds or Asset Reconstruction Companies to take over the bad debts of banks, allowing them to start on a clean-slate.<ref name = "Frontline"/><ref>{{cite news
|title = Asset reconstruction firm mooted to issue swap bonds for bad loans|url = http://expressindia.indianexpress.com/fe/daily/19980506/12655284.html|work = Banking Bureau,Expressindia.com|date = 6 May 1998|access-date = 23 February 2011}}</ref><ref>{{cite news
| title = Panel moots ARC to tackle mounting NPA
| url = http://www.indianexpress.com/res/web/pIe/ie/daily/19980506/12650034.html
| work = ENS ECONOMIC BUREAU, Expressindia.com
| date = 6 May 1998
| access-date = 23 February 2011
}}</ref> The option of re-capitalization through budgetary provisions was ruled out. Overall the committee wanted a proper system to identify and classify NPAs,<ref name="JainKhanna"/> NPAs to be brought down to 3% by 2002<ref name = "Frontline"/> and for an ''independent loan review mechanism'' for improved management of loan portfolios.<ref name="JainKhanna"/>
The committee's recommendations led to introduction of a new legislation which was subsequently implemented as the [[Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002|Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002]] and came into force with effect from 21 June 2002.<ref>{{cite news
| title = NEW LEGISLATION FOR RECOVERY OF DEBTS
| url = http://pib.nic.in/archieve/lreleng/lyr2002/rmay2002/20052002/r200520021.html
| work = Press Information Bureau, Government of India
| date = 20 May 2002
| access-date = 23 February 2011}}</ref><ref>{{cite web|url=http://www.icai.org/resource_file/11432p687-694.pdf
|title=Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
|access-date=2011-02-22}}</ref><ref>{{cite web|url=http://www.drat.tn.nic.in/Docu/Securitisation-Act.pdf
|title=Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
|access-date=2011-02-22}}</ref>

=== Capital adequacy and tightening of provisioning norms ===
To improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribed [[Capital adequacy ratio|capital adequacy]] norms.<ref name = "Kalyan"/> This would also improve their risk taking ability.<ref name="rbidocs.rbi.org.in"/> The committee targeted raising the [[capital adequacy ratio]] to 9% by 2000 and 10% by 2002 and have penal provisions for banks that fail to meet these requirements.<ref name = "Frontline"/><ref name="JainKhanna"/> For asset classification, the Committee recommended a mandatory 1% in case of standard assets and for the accrual of interest income to be done every 90 days instead of 180 days.<ref name="BNI"/>

To implement these recommendations, the RBI in Oct 1998, initiated the second phase of financial sector reforms by raising the banks' capital adequacy ratio by 1% and tightening the prudential norms for provisioning and asset classification in a phased manner on the lines of the Narasimham Committee-II report.<ref name = "IE1">{{cite web|url=http://www.indianexpress.com/res/web/pIe/ie/daily/19981031/30450044.html |title=RBI policy sets deadline for banking reforms|publisher=Indian Express Article |access-date=2011-02-19}}</ref> The RBI targeted to bring the capital adequacy ratio to 9% by March 2001.<ref name = "IE2">{{cite web|url=http://www.expressindia.com/fe/daily/19981031/30455714.html |title=Reforms have been taken up in right earnest: Narasimhan |work=The Indian Express |access-date=2011-02-19}}</ref> The mid-term Review of the Monetary and Credit Policy of RBI announced another series of reforms, in line with the recommendations with the committee, in October 1999.<ref name="BNI"/>

=== Entry of foreign banks ===
The committee suggested that the foreign banks seeking to set up business in India should have a minimum start-up capital of $25 million as against the existing requirement of $10 million. It said that foreign banks can be allowed to set up subsidiaries and joint ventures that should be treated on a par with private banks.<ref name = "Frontline"/>

==Implementation of recommendations==
In 1998, RBI Governor [[Bimal Jalan]] informed the banks that the RBI had a three to four-year perspective on the implementation of the committee's recommendations.<ref name="IE1"/>
Based on the other recommendations of the committee, the concept of a [[universal bank]] was discussed by the RBI and finally ICICI bank became the first universal bank of India.<ref name = "IE3"/><ref name = "ICICI">{{cite web|author=ICICI Bank |url=http://www.icicibank.com/aboutus/history.html |title=History of ICICI Bank |publisher=Icicibank.com |access-date=2011-02-19}}</ref><ref name="BN2">{{cite news
| title = First Indian Universal Bank
| url = http://www.banknetindia.com/banking/univ.htm
| work = the banknetindia team
| access-date = 21 February 2011
}}</ref> The RBI published an "Actions Taken on the Recommendations" report on 31 October 2001 on its own website. Most of the recommendations of the Committee have been acted upon (as discussed above) although some major recommendations are still awaiting action from the Government of India.<ref name = RBI>{{cite web|url=http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=251 |title=RBI Action Taken Report |publisher=Rbi.org.in |access-date=2011-02-19}}</ref>

==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.<ref name = "RBI union"/> 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.<ref name="BLSDN"/> This caused some suffering to small borrowers (both individuals and businesses in [[small and medium enterprises|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.<ref>{{cite news | title = INDIA'S ECONOMIC REFORMS: AN APPRAISAL | url=http://planningcommission.nic.in/reports/articles/msalu/index.php?repts=ier.htm | work = [[Montek Singh Ahluwalia]] | date=26 August 1999
}}</ref> 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.<ref name = "Hindu2"/> 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

==References==
{{reflist}}

{{Banking in India}}
{{Economy of India topics}}

{{Portal|India}}

[[Category:Government agencies of India]]
[[Category:Banking in India]]
[[Category:1998 in India]]
[[Category:Economic history of India (1947–present)]]
[[Category:History of banking]]
[[Category:Financial history of India]]

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Narasimham Committee - Revision history

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Akash30: Created an enlightening write-up.