Narasimham Committee: Report and Recommendations on Narasimham Committee 1 and 2

By BYJU'S Exam Prep

Updated on: September 20th, 2023

Narasimham Committee was established to examine India’s banking sector and recommend reforms when the banks were underperforming during the 1991 economic liberalization of India. The Narasimham Committee was formed two times for economic reforms, once in 1991, when Manmohan Singh was the Finance Minister, and again in 1998 when P Chidambaram was the Finance Minister. Under Maidavolu Narasimham, the Narasimham Committee 1 and Narasimham Committee 2 gave insightful recommendations to the government.

The Narasimham Committee and its Recommendations are the backbones supporting the country’s robust economic structure today. The recommendations not only aided the release of the potential of banking in India but they are also identified as a factor towards minimizing the effect of the global economic crisis starting in 2007. The article covers the major reports and recommendations of the Committee.

Narasimham Committee

India liberalized its economy in 1991, but after that, too, the banks were not performing well. India has a mix of private and public sector banks, and during any economic crisis, the banks must be more competitive and effective. The Narasimham Committee was consulted twice for banking sector reforms, one in 1991 and the other in 1998.

Narasimham Committee UPSC Notes

Both times, the committee was under the chairmanship of Maidavolu Narasimham. Maidavolu Narasimham was the 13th Governor of the Reserve Bank of India (RBI) and served from 2 May 1977 to 30 November 1977.

Narasimham Committee 1

The Narasimham Committee 1 was established in 1991 by FM Manmohan Singh to examine the functioning of banks. In August 1991, a nine-member committee was appointed to suggest reforms to the financial system. The committee submitted its recommendations and the report in December 1991 to the Parliament. The Report was titled Narasimham Committee Recommendations on the Financial System (1991).

Narasimham Committee 2

In 1998, the Narasimham Committee 2 was formed by FM P Chidambaram to intimate on the banking sector reforms. The committee submitted its recommendations to the government in April 1998. The government undertook the report and recommendations as it emphasized more human resource development, technological upgradation, and strengthening of the foundation of the banking system by structure, which was the need of the hour.

History of Narasimham Committee 1991

India nationalized most of its banks during the 1960-1970s. This halted the balance of payments crisis of the economy where India had to retrieve gold from the International Monetary Fund (IMF) to lend funds to meet its financial debts, which initiated economic liberalization in India in 1991.

By the late 1980s, Indian Government took many measures to remodel the country’s financial system as many drawbacks and rigidities had developed serious concerns in the Indian banking system. Two Narasimham committees were set up in the 1990s to satisfy the banking requirements.

  • The Narasimhan Committee 1 (Committee on the Financial System – CFS) was set up by Manmohan Singh on 14 August 1991,
  • The Narasimhan Committee 2 (Committee on Banking Sector Reforms) was set up by P. Chidambaram in December 1997.

The Committee presented its report to the Finance Minister in November 1991 which was put forward in Parliament on 17 December 1991. The Narasimham-II Committee was assigned with the improvement assessment of the enactment of the banking reforms since 1992. In April 1998, M. Narasimham submitted the report of the Committee to Finance Minister Yashwant Sinha on Banking Sector Reforms (Committee-II).

Recommendations of Narasimham Committee 1

The Narasimham Committee 1 report presents the following recommendations on the financial system:

  • Reduction in SLR and CRR – During 1991, both Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) were extremely high. Due to this, bank resources were not available for government use. The committee recommended reducing the SLR and CRR from 38.5 percent to 25 percent and from 15 percent to 3 to 5 percent, respectively.
  • Reorganization of the Banking sector – The Narasimham Committee 1 recommended reduction in the number of public sector banks. The committee suggested mergers and acquisitions increase the bank’s efficiency. The Committee recommended nationwide the national recognition of 8 to 10 banks.
  • Establishment of the ARF Tribunal – During the 1991 economic crisis, banks’ bad debts and Non-Performing Assets (NPA) were concerning. The committee recommended setting up an Asset Reconstruction Fund (ARF) to take over the proportion of bad and doubtful debts from banks and financial institutions.
  • Removal of Dual Control – At that point, the banking sector in India was regulated by the RBI and the Ministry of Finance. The committee proposed RBI be the sole primary regulator of banking in India.
  • Stop the Directed Credit Program – The committee recommended eliminating government interest rate controls as they were not profitable.
  • Interest Rate Determination – The committee highlighted that the interest rates should be determined based on market forces and not by the Government, which was earlier the case.
  • More Freedom to Banks – To improve the workings of banks, the Narasimham Committee 1 recommended that every bank be free and autonomous to carry out its work. Over-regulation and over-administration should be avoided, and the selection of the Chief Executive and board of directors should be made solely on merit.

Narasimham Committee 2 Recommendations

The Narasimham Committee 2 was formed in 1998 and suggested banking sector reforms. The recommendations by the Narasimham Committee 2 are as follows:

  • Robust Banking System – The Committee recommended merging major public sector banks to boost trade.
  • NPAs and the Concept of Narrow Banking – High Non-Performing Assets (NPAs) were a problem back in 1998, so the Committee recommended Narrow Banking Concept where the banks could put their funds in short-term and risk-free assets. The recommendations led to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
  • Role of RBI – The Narasimham Committee 2 recommended that RBI be the regulator. But, at the same time, they should not have ownership in any bank.
  • Capital Adequacy Ratio – The committee proposed the government should increase the Capital Adequacy Ratio norms.
  • Foreign Exchange – The Committee recommended that the foreign exchange open position limits carry 100% risk weight. The Committee also proposed that the minimum start-up capital for foreign banks should be increased to $25 million from $10 million.

Narasimham Committee UPSC

The Narasimham Committee Recommendations are an important banking sector reform. The main intent of this committee was to analyze the financial sector and advise banking sector reforms. Narasimham Committee suggestions are the basis for drafting every guideline, rule, law, etc. for the economic sector. This topic comes under the Economy section of the UPSC Syllabus.

Students preparing for the IAS exam must refer to Economy Notes for UPSC along with NCERT textbooks for building a strong base on the topic. You can also practice the following Narasimham Committee UPSC questions to score good marks in this segment of the exam.

Narasimham Committee Sample Questions

Question: Concerning the Narasimham committee recommendations, which of the statements is/are correct? (1) Cash Reserve Ratio (CRR) is fixed at 15%, (2) Statutory Liquidity Ratio is fixed at 40%. Select the correct answer using the codes given below: (1) 1 only, (2) 2 only, (3) Both 1 and 2, (4) Neither 1 nor 2
Answer: Neither 1 nor 2

Question: Narsimham committee was related to which of following reforms? (A) Planning implementation reforms, (B) Tax structure reforms, (C) Banking structure reforms, (D) High education reforms
Answer: Banking structure reforms

2001 Question: Which of the following committees examined and suggested Financial Sector reforms? (a) Bhagwati Committee, (b) Narasimham Committee, (c) Chelliah Committee, (d) Abid Hussian Committee
Answer: Narasimham Committee

1995 Question: The Narasimham Committee for financial sector Reforms has suggested a reduction in: (a) CRR, Priority Sector Financing and Financing to the capital goods sector, (b) SLR, CRR, and Priority Sector Financing, (c) SLR and CRR, (d) SLR and Financing to the capital goods sector
Answer: SLR, CRR, and Priority Sector Financing

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