Narasimham Committee

Narasimham Committee

Narasimham Committee

Banking sector reforms in India were conducted on the basis of Narasimham Committee reports I and II (1991 and 1998 respectively). The recommendations of Narasimham committee 1991 are No more nationalization;

  • create a level playing field between the public sector, private sector and foreign sector banks
  • select few banks like SBI for global operations
  • reduce Statutory Liquidity Ratio(SLR) as that will leave more resources with banks for lending
  • reduce Cash Reserve Ratio (CRR) to increase \endab\e resources of "Danks
  • rationalize and better target priority sector lending as a sizeable portion of it is wasted and also much of it turning into non-performing asset. 
  • introduce prudential norms for better risk management and transparency in operations.
  • deregulate interest rates
  • Set up Asset Reconstruction Company (ARC) that can take over some of the bad debts of the banks and financial institutions and collect them for a commission.

 Most of these reforms are implemented except priority sector lending which is welfare-based and relates to agriculture. SLR is 23% today and CRR is 4.75%. Bank rate is aligned with MSF. (2012)

 Divestment in public sector banks led to their listing on the stock exchanges and their performance has improved.

Narasimham Committee-II Recommendations

The report was submitted April 1998. The recommendations are :

  1. Increase in capital adequacy ratio to 9% by 2000 and to 10% by 2002 A.D. The R.B.I, should have powers to raise capital adequacy for individual banks. 
  2. Merger of strong banks with strong banks but not with weak banks. 
  3. The minimum shareholding of Government in equity of nationalised banks and SBI to be brought down to 33%. 
  4. Government may consider conversion of public sector banks into companies under the Companies Act.
  5. Government guaranteed advances that have turned into bad debts should be treated as’NPA’s. Income recognition, asset classification and provisioning norms should be applied to government guaranteed advances. 
  6. The associate banks of SBI should be constituted like nationalised banks with a chairman-cum-managing director and two wholetime directors. 
  7. The paid up capital for new private banks to be raised from 100 crore.  
  8. The minimum start-up capital for foreign banks should be raised from 10 million dollars to 25 million dollars. The foreign banks should be allowed to set up subsidiaries / joint ventures in India and should be treated on par with private banks. 
  9. An Asset Reconstruction Company should be set up. All non-recoverable NPA’s should be transferred to it and the company would issue NPA swap bonds to banks. 
  10. Weak banks to be confined to narrow banking.

SARFAESI ACT, 2002 

The SARFAESI Act, 2002, allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their NPAs by adopting measures for recovery or reconstruction.

The Act gives powers of ' seize ' to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures : 

(i)      Take possession of the security for the loan ;

(ii)     Sale or lease or assign the right over the security and 

(iii) Manage the same or appoint any person to manage the same.  

The SARFAESI Act also provides for the establishment of asset reconstruction companies regulated by the RBI to acquire assets from banks and financial institutions. The Act provides for sale of financial assets by banks and financial institutions to asset reconstruction companies. The RBI has issued guidelines to banks on the process to be followed for sales of financial assets to asset reconstruction companies.

ARBITRATION AND CONCILIATION (AMENDMENT) ACT, 2015

 The Arbitration and Conciliation (Amendment) Act , 2015 , ( Amendment Act ) was notified in the Official Gazette on 1 January 2016 for making arbitration a preferred mode for settlement of commercial disputes by making it more user  - friendly and cost effective and leading to expeditious disposal of cases . 

 The Act facilitates quick enforcement of contracts, easy recovery of monetary claims, reduce the pendency of cases in courts and hasten the process of dispute resolution through arbitration so as to encourage foreign investment by projecting India as an investor - friendly country having a sound legal framework and ease doing business in India.

INSOLVENCY AND BANKRUPTCY CODE, 2016

 The Insolvency and Bankruptcy Code (IBC), 2016, was passed by the Parliament on 11 May 2016, received Presidential assent on 28 May 2016 and was notified in the official gazette on the same day .  The code seeks to ensure time - bound settlement of insolvency, faster turnaround of businesses and create a unified database of serial defaulters.

  The Code creates time-bound processes for insolvency resolution of companies and individuals.  These processes will be completed within 180 days.  If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.  

The resolution processes will be conducted by licensed Insolvency Professionals (IPs).  These IPs will be members of Insolvency Professional Agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution. Information Utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution. 

The National Company Law Tribunal (NCLT) adjudicate insolvency resolution for companies.  The DRT will adjudicate insolvency resolution for indivi duals. The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.  

BANKING REGULATION (AMENDMENT) BILL, 2017 

The Union Finance Minister in July 2017 introduced the Banking Regulation (Amendment) Bill, 2017, in the Lok Sabha. It seeks to amend the Banking Regulation Act, 1949, and replace the Banking Regulation (Amendment) Ordinance, 2017.  

It empowers the RBI to resolve the problem of stressed assets.  It allows the RBL to initiate insolvency resolution process on specific stressed assets.  The RBI will also be empowered to issue directives for resolution and appoint authorities or committees to advise the banking companies on stressed asset resolution. The recovery proceedings will be carried out under the Insolvency and Bankruptcy Code, 2016, that provides for a time - bound process to resolve defaults.