Implementation of Recommendations

To implement these recommendations, the RBI in Oct 1998, initiated the second phase of financial sector reforms on the lines of Narasimham Committee-II report. RBI raised Capital Adequacy Ratio by 1% and tightened the prudential norms for provisioning and asset classification in a phased manner (discussed later). It also targeted to bring the capital adequacy ratio to 9% by March 2001.

In October 1999 criteria for “autonomous status” was identified by March 1999 and 17 banks were considered eligible for autonomy. The Committee’s recommendations let to introduction of a new legislation in 2002, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002(SARAFESI Act 2002). Some of the recommendations like reduction in Governments equity to 33%, the issue of greater professionalism and independence of the board of directors of public sector banks are still awaiting Government follow-through.

During the 2008 economic crisis, performance of Indian banking sector was far better than their international counterparts. This was credited to the successful implementation of the recommendations of the Narasimham Committee-II with particular reference to the capital adequacy norms and the recapitalization of the public sector banks. Impact of the two committees has been so significant that the financial-economic sector professionals have been applauding there positive contribution.