“IMPACT OF NARSIMHAN COMMITTEE II ON BANKING SECTOR ”
Author: Yashveer Yashveer Singh Yadav, Yadav, Semester IX, Hidayatullah National Law University, Raipur Raipur INTRODUCTION
From the 1991 India economic crisis to its status of fourth largest economy in the world by 2010, India has grown significantly in terms of economic development. So has its baning sector. !uring this period, recogni"ing the evolving needs of the sector, the Finance #inistry of $overnment of India %$&I' set up various committees with the tas of analysing India(s baning sector and recommending legislation and regulations to mae it more effective, competi comp etitiv tivee and efficie effi cient. nt. )wo such e*pert e*pe rt +omm +ommit itte tees es wer weree set set up und under er the the cha chair irma mans nshi hip p of #. #. ara arasi sim mhan han. )hey submit bmittted their eir reco recom mmendat ndatiions in the 1990s in rep reports rts wide widely ly nown as the arasimhan +ommittee-I %1991' report and the arasimhan +ommittee-II %199' /eport. )hese recommendations not only helped unleash the potential of baning in India, they are also recogni"ed as a factor towards minimi"ing the impact of global financial crisis starting in 200. 200. nlie nlie the socialist-democra socialist-democratic tic era of the 190s 190s to190s, India is no longer insulated insulated from fr om the globa gl oball econo ec onomy my and an d yet ye t its it s bans ban s survi survived ved the the 200 200 finan financia ciall crisi crisiss relat relativ ively ely unsca unscath thed, ed, a feat due in part to these arasimham +ommittees
REASONS FOR THE ESTABLISHMENT OF COMMITTEE:
!urin !uring g the the decad decades es of the the 0s 0s and and the the 0s, 0s, Indi Indiaa nationalised most most of its its ban bans. s. )his )his culminated with the balance the balance of payments crisis of the Indian economy where economy where India had to airli airlift ft gold gold to Internationa Internationall #onetary #onetary Fund %I#F %I#F'' to loan loan money money to meet meet its its finan financia ciall obliga obligatio tions. ns. )his )his event event called called into into 3uestio 3uestion n the previo previous us banin baning g policie policiess of India India and trig trigge gered red the the era era of econom economic ic liberal liberalisat isation ion in India India in 1991. 1991. $iven $iven that that rigidi rigidities ties and weanesses had made serious inroads into the Indian baning system by the late 190s, the $overnm $overnment ent of India India %$&I', %$&I', post-cr post-crisis isis,, too too several several steps steps to remode remodell the country country(s (s financial financial system. %Some claim that these reforms were influenced by the I#F and the 4orld the 4orld 5an as as part of their loan conditionality to India in 1991'. )he baning sector, handling 06 of the flow of money in the economy, needed serious reforms to mae it internationally reputable, accelerate the pace of reforms and develop it
into a constructive usher of an efficient, vibrant and competitive economy by ade3uately supporting the country(s financial needs. In the light of these re3uirements, two e*pert +ommittees were set up in 1990s under the chairmanship of #. arasimham %an e*-/5I %/eserve 5an of India' governor' which are widely credited for spearheading the financial sector reform in India. )he first arasimham +ommittee %+ommittee on the Financial System 7 +FS' was appointed by #anmohan Singh as India(s Finance #inister on 18 ugust 1991, and the second one %+ommittee on 5aning Sector /eforms' was appointed by :. +hidambaram as Finance #inister in !ecember 199. Subse3uently, the first one widely came to be nown as the arasimhan +ommittee-I %1991' and the second one as arasimhanII +ommittee %199'. )he purpose of the arasimham-I +ommittee was to study all aspects relating to the structure, organisation, functions and procedures of the financial systems and to recommend improvements in their efficiency and productivity. )he +ommittee submitted its report to the Finance #inister in ovember 1991 which was tabled in :arliament on 1 !ecember 1991. )he arasimham-II +ommittee was tased with the progress review of the implementation of the baning reforms since 1992 with the aim of further strengthening the financial institutions of India. It focussed on issues lie si"e of bans and capital ade3uacy ratio among other things. #. arasimham, +hairman, submitted the report of the +ommittee on 5aning Sector /eforms %+ommittee-II' to the Finance #inister ;ashwant Sinha in pril 199. M. NARASIMHAM COMMITTEE REPORT II ON BANKING SECTOR REFORMS
In 199 the government appointed yet another committee under the chairmanship of #r. arsimhan. It is better nown as the 5aning Sector +ommittee. It was told to review the baning reform progress and design a programme for further strengthening the financial system of India. )he committee focused on various areas such as capital ade3uacy, ban mergers, ban legislation, etc. It submitted its report to the $overnment in pril 199 with the following recommendations. 1.
Strengthening Bn!" in In#i < )he committee considered the stronger baning
system in the conte*t of the +urrent ccount +onvertibility (++(. It thought that Indian bans must be capable of handling problems regarding domestic li3uidity and e*change
rate management in the light of ++. )hus, it recommended the merger of strong bans which will have (multiplier effect( on the industry. 2.
Nrr$% Bn!ing< )hose days many public sector bans were facing a problem of the
on-performing assets %:s'. Some of them had :s were as high as 20 percent of their assets. )hus for successful rehabilitation of these bans it recommended (arrow 5aning +oncept( where wea bans will be allowed to place their funds only in short term and ris free assets. =.
C&it' A#e()*+ Rti$< In order to improve the inherent strength of the Indian
baning system the committee recommended that the $overnment should raise the prescribed capital ade3uacy norms. )his will further improve their absorption capacity also. +urrently the capital ade3uacy ration for Indian bans is at 9 percent. 8.
Bn! $%ner"hi&< s it had earlier mentioned the freedom for bans in its woring
and ban autonomy, it felt that the government control over the bans in the form of management and ownership and ban autonomy does not go hand in hand and thus it recommended a review of functions of boards and enabled them to adopt professional corporate strategy. >.
Re,ie% $- n!ing '%"< )he committee considered that there was an urgent need for
reviewing and amending main laws governing Indian 5aning Industry lie /5I ct, 5aning /egulation ct, State 5an of India ct, 5an ationali"ation ct, etc. )his upgradation will bring them in line with the present needs of the baning sector in India. part from these ma?or recommendations, the committee has also recommended faster computeri"ation, technology upgradation, training of staff, depolitici"ing of bans, professionalism in baning, reviewing ban recruitment, etc.
IMPACTS OF REFORMS ON THE BANKING INDUSTR/: 1. Brn*h E0&n"i$n: )he Indian baning industry had made sufficient progress during the reforms
period.
)he progress of the industry can be ?udged in terms of branch e*pansion and growth of cre dit anddeposits. @owever, the branch e*pansion of the S+5s has slowed down during the post 1991 era but population per ban branch has not changed much and the figure is
hovering around 1>,000 per branch. )herefore, baning sector has maintained the gains in terms of branch networ in the phase of social baning during the reform period. 2. Intere"t Rte Dereg)'ti$n: )he main aim of the interest rate reforms was to simplify the comple* and the tiered interest rate structure that India had during pre-1990. !ifferent interest rates, based upon si"e, purpose, maturity of loan, group, sector, region, etc., were rationali"ed to converge at a single lending rate called as prime lending rate over a period of five years. )he aim was to provide more options and fle*ibility to bans for their asset liability management operations and shift towards indirect monetary control %Aohli, 200>'. )he motive behind the liberali"ation of interest rates in the baning system was to allow the bans more fle*ibility and encourage competition. =. Dire*te# Cre#it !irected credit policies have been an important part of IndiaBs financial sector reforms. nder the directed credit policy commercial bans are re3uired to provide 80 percent of their commercial loans to the priority sectors which include agriculture, small-scale industry, small transport operators, artisans, etc. 4ithin the aggregate ceiling, there are various sub-ceilings for agriculture and also for loans to poverty related target groups. )he arasimhan committee had recommended reduction of the directed credit to 10 percent from 80 percent. )he committee had also suggested narrowing down the definition of priority sector to focus on small farmers and low-income target groups. )he performance of the private sector bans in the area of priority sector lending remain less satisfactory with 12 out of =0 private sector bans failing to achieve the overall priority sector targets. &nly one private sector ban, I+I+I 5an, could achieve the sub-targets within the priority sector. :rivate sector bans credit to weaer sections at 1.2 percent of net ban credit is much lower than the stipulated target of 10 percent for the sector. Foreign bans have achieved the overall priority sector targets and sub-targets for e*port credit and nearly achieve the sub-target with respect to SSI as well. )he priority sector lending witnessed a growth of 1 percent in2010-2011 over the previous year. @owever the growth of agriculture advances decelerated to 9.1 percent in 2010-2011 as compared with growth of 2= percent in the previous year.
REGULATOR/ REFORMS: Since the beginning of the financial sector reforms, an important tas of the policy maerBs wasto bring in an appropriate regulatory framewor. )he design of an appropriate regulator y framewor, which encourages competition and efficiency in baning services and at the
same time, ensures a safe baning sector may be very difficult and comple* component of the baning. 5ased on the status of the asset, an asset is classified on to four categories- standard, substandard, doubtful and loss asset. In India, standard assets are defined as credit facilities of which interest or principal or both are paid by due date. $enerally, Sub-standard assets are called :s. substandard asset is called doubtful asset if it remains : for two years 200 0%reduced to 1 months in 2001and further reduced to 12 months over a four-year period starting from #arch 200>'. n asset is called as loss, without any waiting period, where the dues are considered uncollectible or marginally collectible. )he concept of past due in the identification of : was dispensed with from #arch 2001 and the 90 days delin3uency norm was adopted for the classification of :s with effect from #arch 2008. 4hile gross :s in 6 terms have declined steadily from 1>.06 at end march199 to 2.2>6 at end march 2011.)he matter of concern is that the share of priority sector :s in gross :s of domestic bans witnessed an increase in 2010-2011 over previous year. griculture sector contributed 886 of total incremental :s of domestic bans. Similarly, weaer sections :s to weaer sections advances also witnessed an increase in :S5s and private sector bans.
S)&er,i"i$n n# Pri,ti1ti$n $- Bn!"
)he gradual privati"ation of public sector bans has been an important component of baning sector reforms in India. )his has been prompted more by the need to raise capital to meet there vise capital ade3uacy norms, rather than a conscious policy decision on the part of the govt. to withdraw from baning operations %Aohli, 200'. In 1998, the committee on 5aning Sector /eforms %+5S/' suggested to dilute the govt. shareholding in public sector bans to >1 percent. Still the govt. has to recapitali"e public sectorbans to large e*tent through budget ary support. In 2001, govt. ownership in bans was further reduced to == percent with the condition that no individual shareholder can hold more than1 percent of the shares. @owever, the privati"ation of public sector bans in India is not yielding the e*pected result. 5y 199, only 9 public bans %out of 20' had gone for public e3uity to strengthen their capital base. )he dismal performance of these bans in raising capital from the maret could be gauged from the fact that in 199-99 the minimum shareholding of govt. was percent. 5y #arch 2001, 11 public sector bans were listed at the ational Stoc C*change, but the share of top > ban
saccounted for 9> percent of the total traded shares of them. #a?ority ownership of public sector bans by govt. has been a symbol of faith in India and it is an important point in the process of privati"ation.
FUTURE CONCERN AND PROSPECTS: It has been observed that the baning sector in India has provided a mi*ed response to these forms initiated by the /5I and the $overnment of India since the 1991. )he sector has responded very positively in the field of enhancing the role of maret forces, regarding measures of prudential regulations of accounting, income recognition, provisioning and e*posure, reduction of :s and regarding the up gradation of technology. 5ut at the same time the reform has failed to bring up a baning system which is at par with the international level and still the Indian baning sector is mainly controlled by the govt. as public sector bans being the leader in all the spheres of the baning networ in the country. )hus, there are certain concerns, which need to be discussed for improving the overall efficiency of the baning sector<
1. Nee# -$r Bn!" t$ *$n-$r2 t$ the Pri$rit+ Se*t$r3Len#ing Trget: t the aggregate level, ban groups adhere to the targets prescribed by the /5I, however at ban level, there are a number of bans, which were not able to meet the targets set for priority sector as a whole and for agriculture credit. 2. Nee# t$ I2&r$,e the 4)'it+ $- Bn!ing Ser,i*e": It is another area, which re3uires continuous improvement to attract more customers of the formal baning channels. )here is need to promote transparency by way of informing customers about different charges levied by them. =. Nee# t$ -)rther i2&r$,e the E--i*ien*+: #aintaining profitability is a challenge especially in a highly competitive environment. )hus there is a need to reduce operating e*penses in the interest of efficiency and profitability. 8. Nee# t$ C'$"e'+ M$nit$r the 4)'it+ $- A""et": challenging tas in the midst of regular policy rates hie was the management of the 3uality of assets. )hough the $: ratio witnessed improvement in recent years, certain concerns with regard to asset 3uality of the baning sector continued to loom large. Further it is a concern that a substantial portion of the total incremental :s of domestic bans in2010-11 was contributed
by agricultural :. )here is a need to improve credit flow to rural areas. )he matter of concern is the concentration of baning business in a few metropolitan centers. )hus, efforts need to be taen to improve credit flow to the rural areas as also to the north eastern, eastern and central regions. )o conclude, focused attention on the issues that are being confronted by the baning sector may be imperative in the largest interest of securing economic growth with e3uity. &nce these issues are addressed, the Indian baning sector has the potential to become further deeper and stronger. $reater attention to these issues would facilitate better finance structure of the economy and in the medium to long-term lead to broad based economic growth.
CONCLUSION
)he reforms currently underway in the baning sector and in the capital maret, combined with the agenda for reform identified for the insurance sector, represent a ma?or structural overhaul of the financial system. It will certainly bring IndiaDs financial system much closer to what is e*pected of developing countries as they integrate with the world economy.
s in so many other areas, reforms in the financial sector have been of the gradualist variety, with changes being made only after much discussion and over a somewhat longer period than attempted in most other countries. @owever the direction of change has been steady and in retrospect a great deal has been accomplished in the past seven years. It is essential to continue these reforms along the directions already indicated and to accelerate the pace of change as much as possible.
Finally, it is important to recogni"e that financial sector reforms by themselves cannot guarantee good economic performance. )hat depends upon a number of other factors, including especially the maintenance of a favorable macro-economic environment and the pursuit of much needed economic reforms in other parts of the real economy. )he impact of financial sector reforms in accelerating growth will be ma*imi"ed if combined with progress in economic reforms in other areas.
