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Transcript of narsimha committe report
NARASIMHAM COMMITTEE’S AND THE ASSET RECONSTRUCTION COMPANIES
Presented by:
Saurabh Yeolkar Sowmia Surendran Suresh Jain Vidita Vanage Vinay Patel Vishmita Vanage
NARASIMHAM COMMITTEE REPORT 1991 (COMMITTEE ON FINANCIAL SYSTEMS)
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
To Study :StructureOrganisationFunctions
Procedures
To Recommend:Improvements in
Efficiency
Productivity
Profitability
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
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.
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
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
NARASIMHAM COMMITTEE II – 1998 (COMMITTEE ON
BANKING SECTOR REFORMS)
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
Review
Progress & Implementation of banking reforms
Furthur
Strengthening of financial institutions of India
Focus on :
Size of
the Banks
, Capital Adequacy
Ratio
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
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
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
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
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%
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
Need for an ARC
No credit institution
Built-in professional expertise in this task, and who handle recovery as their core business.
Different Models of ARCs
Based on ownershi
p
Based on multiplicity
Based on Resolution Approach
Based on Ownership
Asset workout departments or units of banks
Bank subsidiaries and Bank affiliated companies
Based on Multiplicity:
Based on Resolution Approach:
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.
Asset Reconstruction Company of India Ltd. (ARCIL)
ARCIL
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
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
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
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.