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Banking and Insurance

Notes 4.10 Narasimham Committee Recommendations Regarding
Restructuring the Banking System

The Government of India constituted a Committee under the Chairmanship of
Sh. M. Narasimham, former governor, Reserve Bank of India to examine the structure and
functioning of the existing financial system of India and suggest suitable reforms.
The Committee submitted its report in 1991. Its recommendations are summarized as follows:

1. Structure of the banking sector should be revamped so as to have three or four large
banks.
2. Eight to ten national banks with a network of branches throughout the country should be
engaged in 'Universal' banking. Rural banks should confine their operations only to rural
areas mainly to finance agriculture and allied activities but their eye should be on
profitability.
3. Local banks should operate only in their specific region.
4. Regional rural banks should be permitted to undertake all types of banking business.

5. One or more rural banking subsidiaries should be set up by each public sector bank to take
over all its rural branches.
6. The policy of branch licensing should be abolished and individual banks should have the
freedom to open or close any branch.
7. Appointment of Chief Executives and Directors of the banks should be depoliticised
(without political involvement).

8. Progressive reduction of cash reserve ratio be done.
9. Statutory liquidity ratio should be brought down to 25 per cent over the next five years.
10. The priority sector should be redefined.
11. Interest rates should be deregulated so as to reflect emerging market trends.
12. Banks should adopt uniform accounting practices.

13. Balance sheets of banks should be highly transparent.
14. The commercial banks should achieve a minimum 4 per cent capital adequacy ratio in
relation to risk-weighted assets by March 1993.
15. The government should constitute special tribunal for the quick recovery of loans.

16. An Assets Reconstruction Fund should be established to take over from banks and financial
institutions a portion of their bad and doubtful debts at a discount.
17. Suggestions were given regarding Regional Rural Banks (RRBs):
(i) Structure of rural credit will have to combine the local character of the RRBs and
other resources like the skills and organizational/managerial abilities of the
commercial banks.

(ii) Each public sector bank should set up one or more rural banking subsidiaries to take
over all its rural branches and, where appropriate, swap its rural branches with
those of other banks.
(iii) Such rural banking subsidiaries should be treated on par with RRBs in regard to
CAR/SLR requirements and refinance facilities from NABARD and sponsor banks.

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