T he Narasimham Committee effect on banking system

1. The Narasimham Committee effect on banking system

2. Why the Committee • ‡Phenomenal increase in the geographical coverage of our banking and financial institutions. • Despite impressive quantitative achievement- low efficiency and productivity, bad portfolios performance, and eroded profitability. • Several public sector banks and financial institutions were incurring losses year after year

3. About the committee • ‡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

4. About the committee • ‡Constituted in 1991, the Committee submitted two reports, in 1992 and 1998,which laid significant thrust on enhancing theefficiency and viability of the banking sector • ‡The Narasimham Committee laid the foundation for the reformation of the Indian banking sector

5. Problems faced then • ‡Higher rates of CRR(15%) and SLR(38.5%)‡Directed credit programs‡Political and Administrative interference‡Subsidizing of credit‡Mounting expenditures of banks

6. Major Recommendations • ‡Reduction of Statutory Liquidity Ratio (SLR) to25 per cent over a period of five years • ‡Progressive reduction in Cash Reserve Ratio (CRR) to 3-5% • ‡Phasing out direct credit programs andredefining the priority sector Setting the capital adequacy ratio (CAR) to 8 percent by March 1996

7. Major Recommendations • ‡Opening of More Pvt. sector banks ‡Motivation foreign banks to expand their network by opening new branches • ‡Deregulation of RBI and Finance ministry of India. Making RBI as a regulator of all Banksand let Banks takes participation in equitymarket with govt. stake of 51% • ‡Other Regulation introduced by RBI include Asset classification ,NPA ratio

8. Major Recommendations (cont.) • ‡Corporate Governance : promoting customer relations and office culture • ‡Asset Reconstruction for bringing down NPA in future • ‡Risk Management‡E-Banking

9. Narasimham Committee 2 • Progress of banking sector reforms to date Financial sector reforms to strengthen India's financial system and make it internationally competitive

10. Major Recommendations • ‡Need for stronger banking system‡Experiment with concept of narrow banking‡Small local banks‡Capital Adequacy Ratio‡Review and update banking laws.

11. Effect on banking system • Emergence of new private sector banks • Opening up of vibrant capital market Great impact on banks balance sheets both on assets and liabilities side

12. Effects on banking system • Liability Side • Deposit interest rate • Increase in capital AdequacyRequirement • Asset Side Reforms on Lending rateLower CRR and SLROther Reforms • ‡ Structural Reforms • ‡ Entry to new business lines

13. Some Facts • ‡Nationalization of banks in 1969: 14 banks were nationalized ‡Branch expansion: Increased from 8260 in 1969 to 71177 in 2006 • ‡Population served per branch has come down from 64000 to 16000 • ‡A rural branch office serves 15 to 25 villages within a radius of 16 kms However, at present only 32,180 villages out of 5 lakh have been covered

14. Some Facts • ‡Deposit mobilization • 1951-1971 (20 years)- 700% or 7 times1971-1991 (20 years)- 3260% or 32.6 times1991- 2006 (11 years)- 1100% or 11 times • ‡Expansion of bank credit: Growing at 20-30% p.a. rapid growth in industrial and agricultural output .‡Development oriented banking: priority sector lending

15. Some Facts • ‡Diversification in banking: Banking has moved from deposit and lending to Merchant banking and underwriting Mutual funds Retail banking ATMsInternet bankingVenture capital fundsFactoring

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