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Discuss the major recommendations of Narasimham Committee which was set up in 1991 to analyze the falling efficiency of the Indian banking sector

The Narasimham Committee, established in 1991, made significant recommendations to reform the Indian banking sector to enhance its efficiency and competitiveness. Here are the major recommendations:

1. Banking Sector Reforms

  • Deregulation of Interest Rates: The committee suggested the gradual deregulation of interest rates to allow banks to determine their own rates based on market conditions, thereby increasing competition.

2. Structural Reforms

  • Universal Banking: The committee recommended that banks should be allowed to offer a wide range of financial services, including investment banking and insurance, leading to universal banking.
  • Removal of Branch Licensing: It proposed the abolition of branch licensing to facilitate easier expansion by banks and improve accessibility.

3. Capital Adequacy Norms

  • Introduction of Capital Adequacy Ratio: The committee recommended the implementation of a capital adequacy ratio (CAR) to ensure that banks maintain a minimum level of capital relative to their risk-weighted assets, enhancing financial stability.

4. Asset Classification and Provisioning

  • Improved Asset Classification: The committee emphasized the need for better classification of bank assets and provisioning for bad debts, which would lead to more accurate financial statements and risk assessment.

5. Banking Regulation and Supervision

  • Strengthening Regulatory Framework: Recommendations included enhancing the powers of the Reserve Bank of India (RBI) for regulation and supervision, ensuring that banks adhere to sound banking practices.
  • Establishment of Asset Reconstruction Companies (ARCs): To manage and recover non-performing assets (NPAs), the committee recommended the establishment of ARCs.

6. Financial Sector Reform

  • Strengthening Financial Institutions: The committee advised improving the efficiency of financial institutions and ensuring that they play a more active role in mobilizing resources and providing credit.

7. Privatization and Competition

  • Encouragement of Private Sector Participation: The committee recommended increasing the participation of private banks to foster competition and efficiency within the banking sector.

8. Technological Upgradation

  • Emphasis on Technology: The recommendations included adopting modern banking technologies to enhance operational efficiency and customer service.

Conclusion

The Narasimham Committee’s recommendations laid the groundwork for significant reforms in the Indian banking sector, focusing on deregulation, improved supervision, and enhancing competition. These changes have helped modernize the banking system and improve its efficiency in the subsequent decades.

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