QUES . Analyse the recommendations of the Narasimham Committee Report I and II in controlling Non-Performing Assets (NPAs) of the banking sector in India. UPSC IES/ISS EXAM 2021 General Studies. 200 Words. 5 Marks.
From the 1991 India economic crisis to its status of third largest economy in the world by 2011, India has grown significantly in terms of economic development, so has its banking sector. During this period, recognizing the evolving needs of the sector, the Finance Ministry of the Government of India set up various committees with the task of analyzing India’s banking sector and recommending legislation and regulations to make it more effective, competitive and efficient.
Two such expert Committees were set up under the chairmanship of Maidavolu Narasimham. They submitted their recommendations in the 1990s in reports widely known as the Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998) Report. These recommendations not only helped unleash the potential of banking in India, they are also recognized as a factor towards minimizing the impact of global financial crisis starting in 2007.
The purpose of the Narasimham-I Committee was to study all aspects relating to the structure, organisation, functions and procedures of the financial systems and to recommend improvements in their efficiency and productivity.
The Narasimham-II Committee was tasked with the progress review of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India. It focussed on issues like size of banks and capital adequacy ratio among other things.
Narasimham Committee Recommendations on Non-Performing Assets
Non-performing assets had been the single largest cause of irritation of the banking sector of India. Earlier the Narasimham Committee-I had broadly concluded that the main reason for the reduced profitability of the commercial banks in India was the priority sector lending. The committee had highlighted that ‘priority sector lending’ was leading to the buildup of non-performing assets of the banks and thus it recommended it to be phased out.
Subsequently, the Narasimham Committee-II also highlighted the need for ‘zero’ non-performing assets for all Indian banks with International presence. The 1998 report further blamed poor credit decisions, behest-lending and cyclical economic factors among other reasons for the buildup of the non-performing assets of these banks to uncomfortably high levels.
The Committee recommended creation of Asset Reconstruction Funds or Asset Reconstruction Companies to take over the bad debts of banks, allowing them to start on a clean-slate. The option of re-capitalization through budgetary provisions was ruled out.
Overall the committee wanted a proper system to identify and classify NPAs, NPAs to be brought down to 3% by 2002 and for an independent loan review mechanism for improved management of loan portfolios.
The committee’s recommendations led to introduction of a new legislation which was subsequently implemented as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and came into force with effect from 21 June 2002
