The Narasimham Committee, constituted in 1991 under the chairmanship of M. Narasimham, was tasked with analyzing and suggesting reforms for the Indian financial sector, including the banking sector.

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The committee’s recommendations aimed to address issues such as the inefficiency, weak financial health, and regulatory framework of Indian banks. Here are some of the major recommendations made by the Narasimham Committee:

Capital Adequacy and Prudential Norms:

Recommendation: Strengthen capital adequacy norms for banks to ensure they maintain a minimum level of capital as a percentage of their risk-weighted assets.
Rationale: Enhance the financial soundness and stability of banks, minimizing the risk of insolvency.

Entry of New Private Sector Banks:

Recommendation: Encourage the entry of new private sector banks to introduce competition in the banking industry.
Rationale: Foster efficiency, innovation, and customer service by promoting a competitive environment.

Asset Quality and Asset Reconstruction Companies (ARCs):

Recommendation: Implement measures to address the issue of non-performing assets (NPAs) and establish ARCs to take over and manage distressed assets.
Rationale: Improve the quality of assets in the banking system and promote effective resolution of NPAs.

Banking Autonomy:

Recommendation: Grant greater autonomy to public sector banks, allowing them more flexibility in operations, human resource management, and decision-making.
Rationale: Enhance the efficiency and responsiveness of public sector banks to market dynamics.

Interest Rate Deregulation:

Recommendation: Gradually move towards interest rate deregulation to allow market forces to determine interest rates.
Rationale: Promote a more competitive and efficient financial market by letting interest rates reflect market conditions.

Technology Upgradation:

Recommendation: Encourage the adoption of technology in banking operations, including the use of computerization and electronic banking.
Rationale: Improve efficiency, reduce costs, and enhance customer service through the modernization of banking technology.

Prudential Norms for Income Recognition and Asset Classification (IRAC):

Recommendation: Strengthen prudential norms for income recognition and asset classification to ensure transparency in financial reporting.
Rationale: Enhance the accuracy of financial reporting, allowing stakeholders to make informed decisions.

Entry of Foreign Banks:

Recommendation: Allow the entry of foreign banks and encourage collaboration between Indian and foreign banks.
Rationale: Promote international best practices, technology transfer, and diversification of financial services.

Reduction in Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR):

Recommendation: Gradually reduce SLR and CRR to free up resources for banks and promote lending.
Rationale: Enhance the liquidity position of banks, facilitating increased credit availability.

Regulatory Framework:
- Recommendation: Strengthen the regulatory framework by establishing an autonomous regulatory authority for the banking sector.
- Rationale: Improve the effectiveness of banking supervision and regulation, ensuring the stability of the financial system.

These recommendations played a crucial role in shaping the subsequent reforms in the Indian banking sector, contributing to its modernization, improved efficiency, and increased competitiveness.