Discuss the major recommendations of Narasimham Committee which was set up in 1991 to analyze the falling efficiency of the Indian banking sector

The Narasimham Committee, constituted in 1991, was tasked with examining the various aspects of India’s banking sector and proposing reforms to enhance its efficiency, competitiveness, and stability.

The committee, led by M. Narasimham, submitted two reports, commonly referred to as Narasimham Committee I (1991) and Narasimham Committee II (1998). Here are the major recommendations of each report:

Narasimham Committee I (1991):

1. Liberalization of Licensing Policies: The committee recommended liberalizing the licensing policy for new private sector banks to foster competition and improve efficiency in the banking sector.
2. Reduction of Statutory Liquidity Ratio (SLR): It suggested a gradual reduction in the SLR, which is the proportion of deposits that banks are required to maintain in the form of liquid assets such as cash, gold, or government securities. Lowering the SLR would free up resources for banks to lend more effectively.
3. Reduction of Cash Reserve Ratio (CRR): The committee recommended reducing the CRR, which is the percentage of deposits that banks must keep with the central bank as reserves. Lowering the CRR would increase the funds available for banks to lend, thereby stimulating credit creation and economic growth.
4. Entry of New Private Sector Banks: It proposed allowing the entry of new private sector banks to increase competition, efficiency, and innovation in the banking sector. This recommendation led to the establishment of several new private banks in India.
5. Enhancement of Operational Autonomy: The committee emphasized the need to grant greater autonomy to public sector banks in decision-making, including management of resources, personnel, and operations, to improve their efficiency and performance.

Narasimham Committee II (1998):

1. Recapitalization of Public Sector Banks: The committee recommended recapitalizing public sector banks to strengthen their capital base and improve their ability to absorb losses, enhance asset quality, and meet regulatory requirements.
2. Strengthening Banking Regulations and Supervision: It emphasized the importance of enhancing regulatory and supervisory frameworks to ensure the soundness and stability of the banking system. This included measures such as risk-based supervision, prudential norms, and capital adequacy requirements (Basel norms).
3. Asset Reconstruction Companies (ARCs): The committee proposed the establishment of Asset Reconstruction Companies (ARCs) to help banks address the problem of non-performing assets (NPAs) and bad loans more effectively by acquiring and restructuring distressed assets.
4. Strengthening Corporate Governance: It stressed the importance of improving corporate governance practices in banks to enhance transparency, accountability, and risk management. This included measures such as the separation of the roles of Chairman and CEO, strengthening of board oversight, and disclosure requirements.
5. Deregulation of Interest Rates: The committee recommended further deregulating interest rates to allow greater flexibility in pricing of bank products and services, which would promote competition, efficiency, and innovation in the banking sector.

Overall, the recommendations of the Narasimham Committee played a significant role in shaping the trajectory of banking sector reforms in India, contributing to the modernization, liberalization, and strengthening of the banking system.