2.5.2. Narasimham Committee II

It was setup by the Finance Ministry of the Government of India under the chairmanship of Mr.

M. Narasimham in 1998. Its aim was to review the progress of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India. The Committee’s Report focused on issues like size of banks and capital adequacy ratio.

♤ Need for a Stronger Banking System: It recommended the merger of strong banks, which will have a “multiplier effect” on industry. It also supported that two or three large strong banks be given international or global platform to work on.

♤ Stricter norms for NPAs: Some of the PSBs had NPAs as high as 20 percent of their assets. For successful rehabilitation of these banks, the committee recommended Narrow Banking Concept. As per this, the weak banks were to be allowed to place their funds only in short term and risk free assets.

♤ Greater Autonomy for the PSBs: Greater autonomy was proposed for the public sector banks in order for them to function with equivalent professionalism as their international counterparts. The Committee recommended: GoI equity in nationalized banks be reduced to 33% , RBI to relinquish its seats on the board of directors of these banks, review of functions of banks boards with a view to make them responsible for enhancing shareholder value through formulation of corporate strategy and reduction of government equity

♤ Capital Adequacy Norms: To improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribed capital adequacy norms to improve their Risk absorption capacity. The committee targeted raising the capital adequacy ratio to 9% by 2000 and 10% by 2002. The Committee recommended penal provisions for banks that fail to meet these requirements.