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NARISHMAM COMMITTEE

ON BANKING SECTOR

REFORMS

By Eshanth Agarwal

• 1991 -RBI proposed the committee chaired by M.Narasimham, former RBI Governor to review the Financial

1991 -RBI proposed the committee chaired by M.Narasimham, former RBI Governor to review the Financial System

‡Review- aspects relating to the Structure, Organization, Procedures and Functioning of the financial system

Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector.

The Narasimham Committee laid the foundation for the reformation of the Indian banking sector.

• Higher rates of CRR(15%) and SLR(38.5%) • Directed credit programs • Political and Administrative interference

Higher rates of CRR(15%) and SLR(38.5%)

Directed credit programs

Political and Administrative interference

Subsidizing of credit

Mounting expenditures of banks

• Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five

Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years

Progressive reduction in Cash Reserve Ratio (CRR) to 3-

5%

Phasing out of directed credit programmed and redefinition of the priority sector

Stipulation of minimum capital adequacy ratio of 8 per cent by March 1996. (Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures.)

Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts

• Setting up of special tribunals to speed up the recovery process of loans • Setting

Setting up of special tribunals to speed up the recovery process of loans

Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount

Abolition of branch licensing

Liberalizing the policy with regard to allowing foreign banks to open offices in India

Giving freedom to individual banks to recruit officers Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks Speedy liberalization of capital market

Enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down prudential norms for such institutions, etc

• 1998- Finance minister appointed Mr. Narasimham as chairman of one more committee. • This committee

1998- Finance minister appointed Mr. Narasimham as chairman of one more committee.

This committee was asked to “review the progress of banking sector reforms to date and a programmed on financial sector reforms to strengthen India's financial system and make it internationally competitive”.

The committee submitted its report to the government in April

1998.

The report covered issues like- capital adequacy, bank mergers, recasting bank board, and creation of global sized banks.

Need for stronger banking system

Experiment with concept of narrow banking

Small local banks

Capital Adequacy Ratio

Review and update banking laws.

THANK U