narsimha committe report

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NARASIMHAM COMMITTEE’S AND THE ASSET RECONSTRUCTION COMPANIES

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Transcript of narsimha committe report

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NARASIMHAM COMMITTEE’S AND THE ASSET RECONSTRUCTION COMPANIES

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Presented by:

Saurabh Yeolkar Sowmia Surendran Suresh Jain Vidita Vanage Vinay Patel Vishmita Vanage

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NARASIMHAM COMMITTEE REPORT 1991 (COMMITTEE ON FINANCIAL SYSTEMS)

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INTRODUCTION The 1st Narasimham Committee was set up by

Manmohan Singh as India’s Finance Minister on 14th August 1991

A nine member committee was set up under the chairmanship of M. Narasimham, a former Governor of Reserve Bank of India

The Committee submitted its

Report to the Finance Minister

in November 1991

NARASIMHAM COMMITTEE REPORT - I

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To Study :StructureOrganisationFunctions

Procedures

To Recommend:Improvements in

Efficiency

Productivity

Profitability

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RECOMMENDATIONS1. Structural Reorganisation of the Banking

Structure: Committee proposed a substantial reduction in the

number of public sector banks through mergers and acquisitions

2. Freedom to Foreign Banks to open Offices: The Government should allow foreign banks to open

offices in India either as branches or as subsidiaries

3. Removal of the Duality of Control of Banks: The present system of dual control over the banking

system between Reserve Bank and the Banking Division of the Ministry of Finance should end immediately

3 to 4 large banks

8 to 10 national banks

Local Banks

Rural Banks

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RECOMMENDATIONS4. Setting up of Assets Reconstruction Fund: “Assets Reconstruction Fund” to take over from the

nationalised banks and financial institutions, a portion of their bad and doubtful debts at a discount

5. Special Tribunals for Recovery of Loans: The committee recommended that special tribunals

should be set up for recovering loans granted by banks

6. Directed Credit Programmes: Gradually phase out the directed credit programme Redefine the concept of priority sector – to include

only the weakest section of the rural community.

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RECOMMENDATIONS7. Statutory Liquidity Ratio (SLR) & Cash Reserve

Ratio (CRR): The SLR should be gradually reduced from the present

38.5 per cent to 25 percent over the next five years The CRR should be progressively reduced from the

present high level of 15 per cent to 3 to 5 per cent.

8. De-regulation of Interest Rates: All the controls and regulations on interest rates on

lending and deposit rates of banks and financial institutions should be removed

9. Capital Adequacy: By March 1996 the banks should achieve 8 per

cent capital adequacy ratio as recommended by Basel Committee

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RECOMMENDATIONS

10. Banks in the Private Sector: The Reserve Bank of India should permit the setting up of

new banks in the private sector, provided they satisfy all the conditions and norms prescribed by the Reserve Bank

11. Free and Autonomous Banks: The public sector banks should be free and autonomous.

12. Proper Classification of Assets: The assetsof bank should be classified into 4 categories:

(a) standard (b) sub-standard(c) doubtful, and (d) loss assets

Full disclosures of assets and liabilities should be made in the balance-sheets of banks

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NARASIMHAM COMMITTEE II – 1998 (COMMITTEE ON

BANKING SECTOR REFORMS)

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INTRODUCTION

The 2nd Narasimham Committee was set up by P.Chidambaram as Finance Minister of India in December 1997

It is also known as the Committee on Banking Sector Reforms

The Committee submitted the report to the Finance Minister Yashwant Sinha in April 1998

NARASIMHAM COMMITTEE REPORT - Ii

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Review

Progress & Implementation of banking reforms

Furthur

Strengthening of financial institutions of India

Focus on :

Size of

the Banks

, Capital Adequacy

Ratio

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RECOMMENDATIONS1. Autonomy in banking Greater autonomy was proposed for the public sector

banks – in both ownership & management GOI equity in nationalized banks be reduced to 33% Professionalising and depoliticising bank board Review "of recruitment procedures, training and

remuneration policies

2. Reform in the role of RBI to segregate regulatory and supervisory function of

RBI need for RBI to maintain in an arms' length form those

being regulated the need for withdrawing RBI nominee for bank

boards

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RECOMMENDATIONS3. Stronger banking system Merger of the strong banks – to make them strong enough

for supporting international trade A three tier banking sector in India

4. Capital adequacy and tightening of provisioning norms

Raising the capital adequacy ratio to 9% by 2000 and 10% by 2002

have penal provisions for banks that fail to meet these requirements

Large banks – International

Banks

8 to 10 National Banks

Large no. – Regional & Local Banks

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RECOMMENDATIONS

5. Non performing assets need for 'zero' non-performing assets for all Indian

banks with International presence A need for 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

6. Entry of Foreign Banks foreign banks seeking to set up business in India

should have a minimum start-up capital of $25 million as against the existing requirement of $10 million

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OTHER RECOMMENDATIONS Need for computerisation process in public sector banks

Higher capital adequacy requirements for banks

Setting up of small local banks which would be confined to states or cluster of districts in order to serve local trade, small industry, and agriculture

Urgent Need to review and amend the provisions of:

- RBI Act

- Banking Regulation Act

- Bank Nationalisation Act

- State Bank of India Act

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IMPLEMENTATION OF RECOMMENDATIONS

Successfully Implemented: The concept of a universal bank was discussed by the RBI and

finally ICICI bank became the first universal bank of India 17 banks were considered eligible for autonomy CRR and SLR has been brought down gradually over the years There were a string of mergers in banks during late 90s and

2000s

Still awaiting government approval : Issue of greater professionalism Issue of the board of directors of public sector banks Reduction in Government's equity to 33%

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Asset reconstruction means acquisition by any securitization company or reconstruction company, of any right or interest of any bank or financial institution in any financial assistance, for the purpose of realization of such financial assistance.

Asset reconstruction company

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Need for an ARC

No credit institution

Built-in professional expertise in this task, and who handle recovery as their core business.

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Different Models of ARCs

Based on ownershi

p

Based on multiplicity

Based on Resolution Approach

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Based on Ownership

Asset workout departments or units of banks

Bank subsidiaries and Bank affiliated companies

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Based on Multiplicity:

Based on Resolution Approach:

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Asset Reconstruction Companies –The Indian Scenario

The idea of Asset Reconstruction first surfaced in the Narasimhan Committee Reports

The Second Narasimhan Committee Report recommended that the core NPAs of the banks would be transferred to a new entity (an ARC) which, in turn, would issue NPA swap bonds at the realisable value arrived at after due assessment.

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Asset Reconstruction Company of India Ltd. (ARCIL)

ARCIL

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Shareholding Pattern: Equity Base: Rs. 10 crore

Institution Stake % Amount(Rs. Crores)

ICICI Bank 24.5 2.45

IDBI 24.5 2.45

SBI 24.5 2.45

HDFC 10.0 1.00

HDFC Bank 10.0 1.00

Clutch of banks (incl Federal Bank & IDBI Bank)

06.5 0.65

Total 100 10.00

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Methodology to be adopted

Banks & FIs ARC

SPV1

Maturity

Based

SPV2

Industry

Based

SPV3

Location Based

Creation of NPA Portfolios based on various criteria

PTCs or

Units or

Securities

NPAs

ADBFunds

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Assets Care Enterprise Ltd (ACE)

Institution Stake % Amount (Rs. Crores)

IFCI Ltd. 49.00 2.45

Punjab National Bank 26.00 1.30

Tourism Finance Corporation of 14.20 0.71

Life Insurance Corporation of 10.00 0.50

Madhya Pradesh Consultancy Organisation

00.80 0.04

                                            Total 100.00 5.00

Shareholding Pattern: Equity Base: Rs. 5 crore

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Todays scenario Bad debts are rising as borrowers default due to slowing economy, high

interest rates

Arcil expects to acquire Rs. 1,000–1,300 crore of assets this year, up from Rs. 20–24 crore in the last fiscal

Bad debts in the banking industry have crossed Rs. 1 trillion and are rising as slowing economic growth, which fell to 6.5% in the last fiscal from 8.4% in the previous year, and high interest rates cause borrowers to default on their debts.

A government advisory group on ARCs suggested in December that they be allowed to buy bad debts from non–banking financial companies (NBFCs) as well. This will enlarge the pool of assets available for ARCs and will give them better negotiating power as well.

India has more than 50 ARCs, with Arcil controlling more than 70% of the distressed assets market.

One more issue between banks and ARCs is that the banks prefer to get cash; for larger assets, ARCs issue security receipts (SRs) that they redeem after recovering loans from defaulters.

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