The United Front Government appointed Narasimham Committee to review the progress of reforms in the banking sector. The committee submitted its report to the Finance Minister on April 23, 1998. The main objective of the Banking Sector Reforms Committee was to establish strong, efficient and profitable banking system of the global standard.
The main recommendations of the committee are as follows:
1. Strengthening the Banking System:
The following recommendation is made to strengthen the banking system:
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(i) Capital Adequacy Requirements should take into consideration market risks in addition to credit risks.
(ii) Risk weight on a Government guaranteed advance should be the same as other advances.
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(iii) Minimum Capital to Risk Assets Ratio (CRAR) be increased from the existing 8 percent to 10 percent. There should be penal provisions for bank that do not maintain CRAR.
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(iv) Public sector bank in a position to access the capital market at home or abroad be encouraged.
2. Asset Quality:
The following recommendations have been made to improve asset quality:
(i) The ratio of non-performing assets to the total assets should be reduced.
(ii) For evaluating the quality of assets portfolio, advanced covered by Government guarantees, which have turned sticky, be treated as Non-performing Assets.
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(iii) For banks with a high NPA portfolio, the following two alternative approaches could be adopted.
(a) All loan assets in the doubtful and loss categories should be identified and their ralisable value determined. The assets could be transferred to an Asset Reconstruction Company (ARC) which would issue NPA Scrap Bonds.
(b) The banks with high ratio of Non-Performing Assets (NPA) should issue bonds backed by Government guarantee.
(iv) The interest subsidy element in credit for the private sector should be totally eliminated. Interest rate on loans under Rs. 2 lakhs should be deregulated.
3. System and Methods in Banks:
The committee ma de the following recommendations to improve the systems and methods in banks:
(i) There should be an independent loan review mechanism specially for large borrowed accounts and systems to identify potential Non-performing Assets. (NPA)
(ii) Banks and Financial institutions should have a system of recruiting skilled manpower from the open market.
(iii) Public sector banks should be given flexibility to determine managerial remuneration levels taking into account market trends.
(iv) There may be need to redefine the scope of external vigilance and investigation agencies with regard to banking business.
(v) There is need to develop information and control system in several areas concerning the banking operations.
4. Structural Issues:
The following recommendations have been made regarding structural issues of the banks:
(i) With the conversion of activities between banks and Developmental Financial Institution, the development financial institutions (DFI) should over a period of time convert themselves to bank.
(ii) Banking system should be reconstituted:
(a) 2 or 3 banks with an international status should be established.
(b) 8 or 10 large banks should be established. These banks should take care of the needs of the large and medium corporate sectors and the larger of the small enterprises.
(c) There should be merger of large number of local banks.
(iii) There should be merger of large banks only with the large banks. The large bank should I not be merged with weaker banks.
(iv) Weak banks should be either nutrised into healthy units or close down.
(v) The minimum share of holding by Government Reserve Bank in the equity of the nationalised banks and the state Bank should be brought down to 33%.
(vi) The Reserve Bank of India should not be the owner of any other bank.
(vii) There is need for a reform of the deposit insurance scheme.
(viii) Reserve Bank of India should totally withdraw from the primary marked in 91 treasury bills.
(ix) Necessary changes should be made in banking and debt recovery legislation.
(x) A high of professionalism needs to be introduced as much in the Board level as in Management. The Board of Directors should include efficient and professional persons.
There should be rapid computerisation of the banking There should be modernisation and technology upgradation of the banking operations.
In short according to Narasimham Committee, ‘A strong and efficient banking system functionally diverse and geographically widespread, is critical to the attainment of the objectives of creating a market driven, productive and competitive economy. The reforms in the banking sector has been receiving major emphasis.’