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Narasimham Committee on Financial System

Published on Tuesday, October 13, 2015
A high level committee on Financial System (CFS) was constituted by Government of India in 1991 to examine all aspects relating to structure, organization, function and procedures of the financial system under the Chairmanship of M. Narasimhan.

narsimham committee


The Narasimham Committee’s recommendations aimed at ensuring

  • A degree of operational flexibility of the banks. 
  • Internal autonomy for Public Sector Banks in their decision making process. 
  • Considerable professionalism in banking operations.

The major recommendations of the (CFS) or Narasimham Committee I were the following:

  • The Banking supervision should be strengthened and its character must be drastically changed i.e., prudential regulations.
  • The government accepted these recommendations and through the RBI issued guidelines for income recognition, asset classification and provisioning and adopted the Basel Capital adequacy standard.
  • Establishment of a four tier hierarchy for the banking structure with 3 or 4 large Banks including State Bank of India. At the top and Rural Banks at the bottom mainly engaged in financial agriculture and related activities.
  • Phased achievement of 8% capital adequacy ratio as recommended by Basel Committee.
  • Abolition of branch licensing policy.
  • Competition among financial institutions which will adopt a syndicating or participating approach rather a consortium approach.
  • Prudential guidelines should govern the functioning of financial institutions.

NARASIMHAM COMMITTEE ON BANKING SECTOR REFORMS

The Government constituted another committee on the banking sector reforms under the chairmanship of M. Narasimhan in 1997.

The following are the major recommendation of Narasimhan Committee II on the banking sector reforms.
  1. Creation of stronger banking system by merging public sector Banks and the financial institutions.
  2. Stronger Banks and development financial institutions should be merged while weaker and unviable one should be moved up.
  3. 10% increase of capital-to-risk weighted adequacy ratio.
  4. Do away with budgetary, recapitalization of public sector banks.
  5. Strengthening the legal framework for loan recovery.
  6. All banks to cut down their net Non Performing Assets (NPAs) to below 5% by 2000 and to 3% by 2002.
  7. Continuation of licensing to both Domestic and foreign Private Banks.

FREQUENTLY ASKED QUESTIONS:

Define Financial Inclusion.

Financial inclusion means providing to the large inbanked population of India access to financial products and services like deposit accounts and credit facilities, financial advisory services. Steps taken so far promotion for financial inclusion have been the co-operative movement, nationalization of bank, lead bank scheme, regional rural banks, and self help groups and last but not the least no frill accounts.

What is Balanced Growth of an economy?

Growth of an economy in which all aspects of it especially factors of production, grow at the same rate.

What is Gross Domestic Product (GDP)?

Gross Domestic Product (GDP) is the total value of all final goods and services currently produced within the domestic territory of a country in a year.

Difference between economic Growth and Economical Development.

Economic growth is the process whereby the real per capita income continues to grow in the long run whereas the economic development is the process whereby the real per capita income increases in the long run along with reduction in poverty, unemployment and inequality.

Discuss Sustainable Development

Sustainable development is a development that does not deplete resources irreversibly. It is a process of development that meets the needs of the present without comprising the ability of future generations to meet their own needs.

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