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T he Narasimham Committee effect on banking system. W hy the Committee. Phenomenal increase in the geographical coverage of our banking and financial institutions.
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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
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
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
Problems faced then • Higher rates of CRR(15%) and SLR(38.5%)Directed credit programsPolitical and Administrative interferenceSubsidizing of creditMounting expenditures of banks
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
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
Major Recommendations (cont.) • Corporate Governance : promoting customer relations and office culture • Asset Reconstruction for bringing down NPA in future • Risk ManagementE-Banking
Narasimham Committee 2 • Progress of banking sector reforms to date Financial sector reforms to strengthen India's financial system and make it internationally competitive
Major Recommendations • Need for stronger banking systemExperiment with concept of narrow bankingSmall local banksCapital Adequacy RatioReview and update banking laws.
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
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
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
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
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