The recommendations of Narsimhan Committee regarding the banking sector in India

On 14 August 1991, the government of India constituted a nine member committee under the chairmanship of Mr. M Narasimhan a retired RBI Governor for making recommendations on existing financial system and to give suggestions for improving the existing structure. Some of the recommendations are as below: 

• Recommend a stronger banking system in the country especially in the content of capital account convertibility (CAC) which would involve large inflows and outflows of capital and consequent complications for exchange role management and domestic liquidity. For this purpose committee recommended the merger of strong banks which will have a multiplier effect on industry. 

• The setting up of small local banks. 

• Branch licensing system for opening new bank branches should be abolished. • The setting up of an Asset Reconstruction Fund (ARF) to take over the bad debts of the banks.

• Bank should be given more autonomy and the directed credit should be abolished. 

• The committee recommended the issue of autonomous status of the board for financial supervision of RBI and the need to segregate regulatory and supervision function of RBI. 

• Adopted a liberal view for allowing foreign banks in India. 

• Urgent need to review and amend the provisions of RBI Act, Banking Regulation Act, Bank Nationalization Act, SBI Act etc. to bring them in line with the current need of the banking sector. 

• SLR for banks should be curtailed to the level of 25% within next 5 years. 

• Computerization in bank should be promoted. 

• Granting resources to development finance institutions on concessional rates of interest should be abolished in phase within next 3 years.

• Banks should be authorized to appoint banking official at their own discretion. 

• Quick and effective liberal attitude should adopted in the policy related to capital market system of getting prior permission for their new share issue should also be abolished.