DMPQ: Banking sector was highly regulated and the sad state of affairs of the bank prior to 1991 was mainly because of government mismanagement. In this context discuss the recommendation of Narsimahan Committee.( Economics)

A high level committee on financial system was set up on august 14,1991. The objective of the committee was set up to examine all aspect relating to structure, organisation, function and procedures of the financial system.  The recommendations were majorly aimed at ensuring a degree of operational flexibility; internal autonomy for public sector banks; and ensuring greater degree of professionalism in banking operation.


Major recommendations of the banking sector are as follows:


  1. On direct Investment:
  • Not to use CRR as a principal instrument of money control.
  • CRR should be progressively reduced from present 15% to 3-5%.
  • RBI should pay interest on CRR.
  • Progressive move towards market based programme and reduction in SLR.
  1. On Direct Credit Programme:
  • Direct credit programme should be phased out gradually.
  • The concept of Priority sector lending should be changed and should be reprioritised.
  • PSL to include the weaker sections of rural community.
  1. Structure of interest rates:
  • Interest rates should be defined by market forces.
  • Bank rates should be the anchor rates.
  • The RBI to be the sole authority to simplify the structure of interest rates.
  1. On structural Reorganisation of the bank
  • Substantial reduction in the number of PSBs through mergers and acquisitions.
  • Dual control of RBI and Banking division of RBI division shall go immediately and RBI shall be the Prime agency.
  • Autonomy to RBI.
  • Radical change in work technology and culture
  • Appointment of CMD on professional line
  1. Asset reconstruction Companies
  • To deal with the menace of NPA’s


  1. Other suggestions:
  • Opening of new private sector banks
  • Introduction of capital adequacy norms with international standard.
  • Simplification in banking regulation


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