Narasimham Committee Report

In November 1991, a committee set up by the Government to study the working of the financial system, better known as the Narasimham Commmittee, submitted its report. The main recommendations of the Committee were:

(a) to bring down the SLR in a phased manner to 25 per cent over five years;

(b) to use the CRR as an instrument of monetary policy and not as a means of controlling the secondary expansion of credit brought about by monetisation of the fiscal deficit;

(c) to phase out directed credit programmes and to reduce the requirement to lend to ‘priority sectors’ down to 10 per cent of aggregate credit;

(d) to bring the interest rate on government borrowing in line with other market-determined interest rates and to phase out concessional interest rates;

(e) that banks and financial institutions achieve a minimum 4 per cent capital adequacy ratio in relation to risk weighted assets by March 1993;

(f) that the more profitable public sector banks be permitted to issue fresh capital to the public through the capital market;

(g) that banks and financial institutions adopt uniform accounting practices in regard to income recognition and provisioning for non-performing loans;

(h) that branch licensing be abolished and the matter of opening and closing of branches be le to the commercial judgement of individual banks;

(i) to liberalise policies toward foreign banks with regard to the opening of branches or subsidiaries;

(j) that a quasi-autonomous body under the aegis of the RBI be set up to supervise banks and financial institutions; (k) to phase out the privileged access of development finance institutions to concessional finance; and

(l) in the capital market, freedom be given to issuers of capital to decide on the nature of the instrument, its terms and its pricing.

The recommendations of the committee provided the blueprint of the reforms that followed in the financial sector.

Most of the major recommendations of the Narasimham Committee have been implemented. We summarise them below:

• Cash Reserve Ratio: Average CRR was reduced from 15 per cent to 14.5 per cent in 1993-94 and gradually to 10 per cent in 1996-97.
• Statutory Liquidity Ratio: SLR got reduced from 38.5 per cent to 31.5 per cent in 1994-95 and further to 27 per cent in March, 1997.
• Lending rates structure has been rationalized with six categories being reduced to three by 1993-94 and to 2 in 1994-95.
• Minimum lending rate (MLR) for credit limit of over Rs.2 lakhs has been reduced from 20 per cent to 14 per cent by 1993-94 and abolished by 1994-95.
• Interest rate on domestic term deposits above one year and on non-residential non-repatriable (NRNR) rupee deposits has been decontrolled.
• An agreement has been reached in 1994-95 between RBI and the GOI on pre-determined limit on net issue of ad hoc T bills.
• A risk-asset ratio system for banks was introduced in 1991-92 as a capital adequacy measure.
• A system of income recognition and provisioning for non-performing loans was introduced in 1991-92. As funding required for provisioning was placed at Rs.14000 crores, it was phased over two years. The GOI made a capital contribution of Rs.5700 crores in the budget for 1993-94 and another Rs.5600 crores in the budget for 1994-95.
• The Board of Financial Supervision (BFS) was set up in 1994-95 under the Chairmanship of Governor of RBI to ensure implementation in asset classification, income recognition, and capital adequacy. RBI has set up BFS and a new department called Department of Supervision to strengthen the supervisory and surveillance system of banks and financial institutions.
• Approval was given by RBI ‘in principle’ for establishment of new banks in the private sector. Branch licensing policy was liberalized considerably. ‘Banking Companies Acts’ of 1970-80 were amended in 1994-95 to raise capital by nationalized banks up to 49 per cent from the public. SBI was the first to raise through public issue over Rs.1400 crores as equity, and Rs.1000 crores as bonds. Regarding capital markets, SEBI was granted statutory powers.
• Functions of Controller of Capital Issues was transferred to SEBI.