Narasimham Committee Report 2 - Year 1998

Banking Awareness Study Material

Narasimham Committee Report-2, 1998

In 1998, the government appointed yet another committee under the chairmanship of Mr. Narsimham. It is also known as the Banking Sector Committee. It was told to review the banking reform progress and design a programme for further strengthening the financial system of India.

It gave the following recommendations :

1. Strengthening the Banks in India : The committee thought that banks must be capable of handling problems regarding domestic liquidity and exchange rate management in the light of Current Account Convertibility. Therefore, it recommended the merger of stronger banks which will have 'multiplier effect’ on the banking industry.


2. Narrow Banking : Those days many public sector banks were facing a problem of Non-Performing Assets (NPAs). Some of them had NPAs that were as high as 20 per cent of their assets. Thus, for successful rehabilitation of these banks, it recommended the 'Narrow Banking’ concept where weak banks will be allowed to place their funds only in short-term and risk free assets.


3. Capital Adequacy ratio : The committee recommended to increase the Capital Adequacy norms in order to improve the inherent strength of the Indian Banking System.


4. Professional Corporate Strategy : The committee felt that the government control over the banks in the form of management and ownership and bank 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.


5. Review of the Banking Laws : The committee considered that there was an urgent need for reviewing and amending main laws governing Indian Banking Industry like RBI Act, Banking regulation Act etc. This upgrading will bring them in line with the present needs of the banking sector.

In addition to these recommendations the committee also recommended faster computerization, upgrade of technology, training of staff, depoliticizing of banks, professionalism in banking etc.