Among the recommendations of the Narasimham Committee that have been implemented by Government of India till date are:
1. Deregulation of Entry of Private Sector Banks:
In 1992-93, the entry of private sector banks both domestic and foreign has been deregulated. At present there are 34 domestic and 42 foreign private sector banks.
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The policy of deregulation has been implemented with the objective of generating increased competition for incumbent public sector banks and increased allocational efficiency of the banking system.
The Reserve Bank of India has sought to ensure that the new entrants are professionally managed, financially viable and technologically strong. Capital norms of foreign banks have also been substantially liberalised, joint ventures between foreign and Indian banks have been permitted for the first time since independence.
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2. Liberalised Branch Expansions:
The branch licensing policy has been liberalised. The banks are allowed more freedom to plan branch expansion in response to market needs. However, the permission for branch expansion is subject to certain minimum performance requirements.
3. Deregulation of Interest Rates:
After the reforms interest rates have been deregularised . Prior to 1992, interest rates were completely administered by the RBI and were highly complex and rigid. The RBI would stipulate maximum deposit rates on both savings and time deposits for all maturities as well as minimum lending rates on loans of different sizes and maturities.
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This system guaranteed banks a minimum interest rate spread and measure of protection against mounting losses. Moreover the same rates were charged by all banks. Since 1992, interest rates have been deregulated in a phased manner and by July 1996, banks were allowed to set interest rates on all term deposits and on all advances greater than Rs. 2 lakh.
Each bank is required to announce its own Prime Lending Rates (PLR). The Prime Lending Rate is that rate which a bank charges from its prime borrowers. It was decided with effect from April 29, 1998, that the interest rates on loans upto Rs. 2 lakh should not exceed the prime lending rate (PLR) of the concerned bank. However the lending rates on export are still prescribed.
4. Introduction of Capital Adequacy Norms:
Narasimham Committee recommended the introduction of prudential Norms, to meet international standards. Prudential Norms are controls and limits imposed by the Central Bank on the activities of the banks.
Most common Prudential Norms are related to Capital Adequacy norms and Asset classification. Narasimham Committee recommended the introduction of capital adequacy norm of 8 per cent in tune with the norms set by the Bank for International Settlement (BIS) Bank.
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The capital adequacy ratio expresses the real capital as a percentage of total weighted risks. It indicates the margin of protection available to both depositors and creditors against unanticipated losses that may be experienced by a bank.
A bank’s real capital is the worth evaluated after taking into account about the riskiness of its assets. If all the assets of a bank were riskless, then a bank’s real capital is equal to the book value of the capital.
However if the riskiness of assets are taken into account to evaluate them the value of a bank’s risk weighted assets and hence its capital will be less than the book value. This recommendation has been implemented. All commercial banks are required to maintain a Capital to Risky Assets Ratio (CRAR) of not less than 8 percent in tune with BIS norms.
This sought to minimize the problems of inadequacy of capital compared to risk exposure that has persistently plagued public sector banks. It was hoped that introduction of BIS norms would provide Indian Banks with a comfortable cushion against insolvency thereby ensuring market stability.
In pursuance of Narasimham Committee on Bank Reforms recommendation, the Government of India proposed to raise the minimum capital to Risk-Weighted Asset Ratio (CRAR) from the existing level of 8 percent to 10 percent in phases.
Out of 27 public sector banks, 26 banks attained the stipulated 8 percent CRAR by March 1998. By this date 19 PSB’s attained CRAR exceeding 10 percent.
5. Introduction of Internationally Accepted Norms of Income Recognition:
Along with the introduction of capital adequacy norms, new norms of income recognition asset classification and providing has also been introduced. Asset classification means that the assets of a bank are classified for making provisions.
Assets can be:
(i) Standard or
(ii) Non Performing Assets (NPA).
In India:
(i) Standard Assets are defined as credit facilities with respect to which interest or principal or both are paid by due date, or within 30 days of due date. On the other hand,
(ii) Non-Performing Assets (NPA) is that asset which is not paid for a periods of two quarters. New Norms of Income Recognition asset classification has been introduced to reflect more accurately the quality of loan portfolios and to obtain a true picture of the financial situation of each bank. For example, the profits of 27 public sector banks were reduced by 45 percent due to a switch to the new accounting norms. /
6. Permission to Public Sector Banks to sale their Shares:
Narasimham Committee’s recommendation to allow public sector banks to access the capital market to raise equity has been accepted. In order to enable banks to take care of their additional needs of capital the Government of India decided to allow some of the stronger public sector banks to approach the capital market to directly mobilise the equity funds from the public.
The public is allowed to subscribe upto 49 percent of the capital of public sector banks. State Bank of India was the first public sector banks to sale its share in the market. Till now, 8 Public Sector banks have issued their shares amounting Rs. 6015 crore to the public.
7. Reduction of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR):
Narasimham Committee recommended that CRR and SLR should be gradually reduced. The Reserve Bank has reduced Cash Reserve Ratio to 10 percent and statutory liquidity ratio to 25 percent.
The CRR obligates a bank to hold a certain fraction of its total deposits as reserves with the Central Bank in order to ensure liquidity of the banking system.
CRR imposes an effective loss of income to the banks since the interest earned on these reserves is significantly low (around 5 percent) compared to the return that can be earned in loans.
In India CRR had increased from a low 3 percent as of May 1973 to as high as 15 percent in 1989. Now it has been reduced to 10 percent. It will release more funds to the banks to lend them at a higher rate of interest.
The Statutory Liquidity Ratio (SLR) requires banks to invest a predetermined proportion of their total demand and time liabilities in Government and other approved securities.
Since the interest rate on such securities was significantly below market rates, the SLR requirement negatively affects the income earning capacity of banks. The SLR was 31.5% in 1996 but it has now been reduced to 25 percent.