05-10-2012, 03:51 PM
NARaSIMHAM COMMITTEE
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FINANCIAL SYSTEM
An institutional framework existing in a country to enable financial transactions
Three main parts
Financial assets (loans, deposits, bonds, equities, etc.)
Financial institutions (banks, mutual funds, insurance companies, etc.)
Financial markets (money market, capital market, forex market, etc.)
Regulation is another aspect of the financial system (RBI, SEBI, IRDA, FMC)
Profitability of Banks(1)
Reforms has shifted the focus of banks from being development oriented to being commercially viable
Prior to reforms, banks were not profitable and in fact made losses for the following reasons:
Declining interest income
Increasing cost of operations
Profitability of banks (2)
Declining interest income was for the following reasons:
High proportion of deposits impounded for CRR and SLR, earning relatively low interest rates
System of directed lending
Political interference- leading to huge NPAs
Rising costs of operations for banks was because of several reasons: economic and political
Why the Committee
1969-Banks Nationalization
Effects
Phenomenal increase in the geographical coverage of our banking and financial institutions.
Despite impressive quantitative achievement-low efficiency and productivity, bad portfolios performance, and eroded profitability.
Several public sector banks and financial institutions were incurring losses year after year.
About the committee
1991-RBI proposed the committee chaired by M. Narasimham, former RBI Governor to review the Financial System
Review-aspects relating to the Structure, Organization, Procedures and functioning of the financial system
Constituted in 1991, the Committee submitted two reports, in 1991 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector
The Narasimham Committee laid the foundation for the reformation of the Indian banking sector
Need for Stronger Banking System
The committee has made clear the need of a stronger banking system which would involve large inflows and outflows of large capital and consequent complications for exchange rate management & domestic liquidity.
So committee recommended the merger of strong banks which would have a ‘multiplier effect’ on industry.
Small Local Banks
The committee has suggested setting up small local banks which would be confirmed to states or cluster of districts in order to serve local trade, small industry and agriculture.
At the same time, these banks should have strong corresponding relationship with the larger and international bank.
Experiment with concept of narrow banking
Serious concern for rehabilitation of weak PSBs which have accumulated a high percentage of NPAs in some cases as high as 20% the total assets.
Committee suggested the concept of narrow banking to rehabilitate weak banks.
Narrow banking means that the weak banks place their funds only in the short term in risk free assets- these banks try to match their demand deposits with safe liquid assets.