Recommendations of Narasimham Committee on Banking Sector Reform – 1998

For Banking System

• Pending the emergence of markets in India where market risk can be covered, it would be desirable that capital adequacy requirements take into account market risk in addition to credit risks.
• In the next three years, the entire portfolio of Government securities should be marketed to market and this schedule of adjustment should be announced earliest.
• The risk weight for a Government guarantee advance should be the same as for other advances.
• Foreign exchange open position limits should carry a 100% risk weight.
• An asset be classified as doubtful if it is in the substandard category for 18 months in the first instance and eventually for 12 months and loss if it has been so identified but not written off.
• Banks and financial institutions should avoid the practice of “evergreening” by making fresh advances to their troubled constituents only with a view to setting interest dues and avoiding classification of the loan in question as NPAs.
• Average level of net NPAs for all banks should be reduced to below 5% and 3% by the year 2000 and 2002, respectively, and net NPAs to 3% and 0% by these dates.
• Banks should introduce calculation of interest as monthly rests.
• There should be 100% computerization of bank’s operations. Unless 100% computerisation is made, it may not be feasible to implement the recommendation.
• It is also necessary to tone up the legal machinery for speedy disposal of collateral taken as security for the advance.
• Banks should bring out revised Operational Manual and update them regularly.

Structural Issues

• DFIs should, over a period of time, convert themselves to banks.
• If a DFI does not acquire a banking license with a stipulated time it would be categorized as a non-banking finance company.
• Mergers between banks and between banks and DFIs and NBFCs need to be based on synergies and locational and business specific complementarities of the concerned institutions and must obviously make sound commercial sense.
• A ‘weak bank’ should be one whose accumulated losses and net NPAs exceeds its net worth or one whose operating profits less its income on recapitalization bonds is negative for three consecutive years.
• The policy of licensing new private banks (other than local area banks) may continue. The start-up capital requirement is Rs. 100 crore where set in 1993 and these may be reviewed.
• Foreign banks may be allowed to setup subsidiaries or joint ventures in India. Such subsidiaries or joint ventures should be treated on par with other private banks and subject to the same conditions with regard to branches and directed credit as these banks.
• All NBFCs are statutorily required to have a minimum net worth of Rs. 25 lakh if they are to be registered.
• Then minimum period of FD be reduced to 15 days and all money market instruments should likewise have a similar reduced minimum duration.
• Foreign institutional investors should be given access to the Treasury Bill market.
• The Board for Financial Regulation and Supervision (BFRS) should be given statutory powers and be reconstituted in a way to be composed of professionals.
• RBI should totally withdraw from the primary market in 91 days Treasury Bills.