A high level committee was appointed by the Government of India under the Chairmanship of Shri M. Narasimham in August 1991 to examine all aspects relating to the structure organisation, functions and procedures of the financial system.
The committee’s report was tabled in Parliament on December 17, 1991: The main recommendations of the committee are as follows:
1. Reduction in Liquidity Ratio:
The committee recommended phased reduction in the Statutory Liquidity Ratio (SLR) to 25 percent over a period of five years. It also recommended the progressive reduction in Cash Reserve Ratio (CRR) from the present high level.
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2. Abolition of Directed Credit Programmes:
The directed Credit programmes should be abolished gradually. The priority sector should be redefined.
3. Free Determination of Interest Rates:
The rate of interest should be determined freely without the intervention of the Reserve Bank of India. Attempts should be made to achieve a minimum 4 per cent capital adequacy ratio in relation to risk weighted assets by March 1993.
4. Improvements in Accounting Systems of the Banks:
The committee recommended for the adoption of uniform accounting practices particularly in regard to income recognition and provisioning against doubtful debts. It also recommended imparting for transparency to bank balance sheets and making full disclosures in them.
5. Establishment of Special Tribunals:
The special tribunals should be set up to speed up the process of the recovery of loans. An Assets Reconstruction Fund (ARF) should be established to take over from banks and financial institutions a portion of their bad and doubtful debts at a discount.
6. Reconstitution of Banking System:
(i) The banking system should be restructured so as to have 3 or 4 large banks which could become international in character.
(ii) There should be 8 to 10 national banks with network of branches throughout the country engaged in universal banking.
(iii) There should be local banks whose operation would be generally confined to specific region.
(iv) There should be rural banks whose operation would be confined to rural areas and whose business would be to finance agriculture and allied activities It recommended setting up of one of more rural banking subsidiary by each public sector bank to take over all its rural branches.
(vi) The Regional Rural Banks should be permitted to engage in all types of banking business.
7. Abolition of Branch Licensing:
The committee recommended abolition of branch licensing and leaving the matter of opening or closing of branches to the commercial judgment of individual banks.
8. Foreign Banking:
The committee recommended for liberalizing the policy with regard to allowing foreign banks to open offices in India as branches or as subsidiaries. The foreign operations of Indian banks should be rationalised.
9. More Freedom to Banks:
Banks is given freedom to recruit officers. The banks be inspected on the basis of internal inspection report.
10. Ending of Dual Control:
The dual control over the banking system of the Finance Ministry and Reserve Banks should be ended. The Reserve Bank should establish a separate quasi- autonomous body to take over to supervisory function over the banks.
11. Financial Institutions:
The committee made the following recommendations regarding financial institutions:
(i) Transferring of direct lending function of IDBI to a separated institution while retaining to IDBI apex and refinancing role.
(ii) The Reserve Bank should set up a new agency to supervise financial institutions such as merchant banks, mutual funds, leasing companies, venture capital companies and factor companies.
(iii) Capital market be liberalized.
(iv) An appropriate legal structure be organised arid operate mutual funds on the basis of experience of other countries.
In short, the recommendation by the Narashimham committee would have far reaching implications on the working of banking and financial system in the years to come.