Action Taken on Narasimham-II Committee (2001, RBI)


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

By 2001 following actions were taken on Narasimham-II Committee Report - 1998

- Banks are now required to assign capital for market risk. A risk weight of 2.5% for market risk has been introduced on investments in Govt. and other approved securities with effect from the year ending 31st March, 2000. For investments in securities outside SLR, a risk weight of 2.5% for market risk has been introduced with effect from the year ending 31st March, 2001. 

-- The percentage of banks’ portfolio of Govt. and approved securities which is required to be marked to market has progressively been increased

-- In cases of Govt. guaranteed advances, where the guarantee has been invoked and the concerned State Govt. has remained in default as on March 31, 2000, a risk weight of 20% on such advances, has been introduced. State Govts. who continue to be in default in respect of such invoked guarantees even after March 31, 2001, a risk weight of 100% is being assigned. 

--- Risk weight of 100% has been introduced for foreign exchange open position limits with effect from March 31, 1999.

-- The minimum capital to risk asset ratio (CRAR) for banks has been enhanced to 9% with effect from the year ending March 31,2000. 

-- Banks are permitted to access the capital market.

-- Banks have been advised that an asset will be classified as ‘doubtful’ if it has remained in the substandard category for 18 months instead of 24 months as at present, by March 31, 2001. Banks have been permitted to achieve these norms for additional provisioning in phases, as under : 
As on 31.3.2001
Provisioning of not less than 50% on the assets which have become doubtful on account of the new norm.

--- In the Monetary and Credit Policy announced in April 2001, the banks have been advised to chalk out an appropriate tranisition path for smoothly moving over to 90 days norm. 

-- Prudential norms in respect of advances guaranteed by State Governments where guarantee has been invoked and has remained in default for more than two quarters has been introduced in respect of advances sanctioned against State Government guarantee with effect from April 1, 2000. Banks have been advised to make provisions for advances guaranteed by State Governments which stood invoked as on March 31, 2000, in phases, during the financial years ending March 31, 2000 to March 31, 2003 with a minimum of 25% each year.

--- The RBI has reiterated that banks and financial institutions should adhere to the prudential norms on asset classification, provisioning, etc. and avoid the practice of 'evergreening'.

--- The Committee believes that the objective should be to reduce the average level of net NPAs for all banks to below 5% by the year 2000 and to 3% by 2002.

This is the long-term objective which RBI wants to pursue. Towards this direction, a number of measures have been taken to arrest the growth of NPAs: banks have been advised to tone up their credit risk management systems; put in place a loan review mechanism to ensure that advances, particularly large advances are monitored on an on-going basis so that signals of weaknesses are detected and corrective action taken early ; enhance credit appraisal skills of their staff, etc. In order to ensure recovery of the stock of NPAs, guidelines for one-time settlement have been issued in July,2000.

-- Banks have been advised to take effective steps for reduction of NPAs and also put in place risk management systems and practices to prevent re-emergence of fresh NPAs.

-- The proposal to set up an Asset Reconstruction Company (ARC) on a pilot basis to take over the NPAs of the three weak public sector banks, has been announced in the Union Budget for 1999 – 2000. The modalities for setting up the ARC are being examined.

-- Banks are permitted to issue bonds for augmenting their Tier II capital. Guarantee of the Govt. for these bonds is not considered necessary.

--- The loans to agricultural and SSI sectors are now generally being granted on commercial considerations and on the basis of creditworthiness of the borrower. Further, the concessionality on interest rates for advances has been done away with, except for advances under the DRI Scheme. While advances upto Rs.2 lakh should carry interest rate not exceeding PLR, interest rates on advances of over Rs.2 lakh have been freed.

--- As per the present stipulation, banks are required to lend 10% of net bank credit (NBC) for weaker sections which includes all small and marginal farmers, all IRDP and DRI borrowers, borrowers under SUME etc. The Committee has recommended that the present stipulation may continue. 
As recommended by the Committee, some activities like food processing, related service activities in agriculture, fisheries, poultry, dairying have been brought under priority sector. 

--- Prudential Norms and Disclosure Requirements: The recommendation of the Committee that we should move towards international practices in regard to income recognition is accepted in principle. However, tightening of the prudential norms should be made keeping in view the existing legal framework, production and payment cycles, business practices, the predominant share of agriculture in the country’s economy, etc. The production and repayment cycles in the industry in the country generally involve a period of not less than from 4 to 6 months. A large number of SSIs also have difficulties in timely realization of their bills drawn on the suppliers. These have to be taken into account while contemplating any change in the norm. 

Implementation of the recommendation would have serious implications on the asset portfolio of banks and even good quality borrowers and find it difficult to comply with the norms recommended. There have been representations from banks and financial institutions seeking relaxations in the above instructions by increasing the period to 3-4 quarters. Keeping in view the current industrial scenario, implementation of the recommendation would have serious implications even to healthy borrowers. 

Furthermore, interest on advances is calculated by banks at quarterly rests. Keeping in view the large number and volume of accounts, if we have to implement the recommendation, a few preconditions should be met : - 
[a] Banks should introduce calculation of interest at monthly rests;
[b] There should be 100% computerization of banks’ operations. Unless 100% computerization is made, it may not be feasible to implement the recommendation ;
[c] It is also necessary to tone up the legal machinery for speedy disposal of the collateral taken as security for the advance. 

However, considering the need to bring our norms in line with the best international practices, the recommendations made by the Committee would be our long term objective. As the level of gross NPAs of banks come down because of better management practices, the recommendation to introduce the norm of 90 days will be examined.

-- To start with, a general provision on standard assets of a minimum of 0.25% from the year ended March 31, 2000 introduced.

-- Banks have been advised to disclose the following information, in addition to the existing disclosures, in the ‘Notes on Accounts’ to the balance sheet from the accounting year ended March 31, 2000. 
$ Maturity pattern of loans and advances,
& Maturity pattern of investment securities,
& Foreign currency assets and liabilities
$ Movement in NPAs,
$ Maturity pattern of deposits
$ Maturity pattern of borrowings
$ Lending to sensitive sectors as defined from time to time

-- Detailed guidelines issued to banks on asset – liability management. Implementation of these guidelines would enable banks to avoid liquidity mismatches as also to cover, among others, liquidity and interest rate risks.

--- Comprehensive guidelines have been issued to enable banks to put in place appropriate risk management systems. Banks have also been advised to adopt statistical risk management techniques like Value-at-Risk ( which is a statistical method of assessing the potential maximum loss from a credit or investment exposure, over a definite holding period at a given confidence level) or other models appropriate to their level of business operation

--- Banks have been advised to bring out revised Operative Manuals and update them regularly. Banks have confirmed having brought out revised Manuals. 

-- RBI had in 1992 emphasised to banks the importance of an effective management reporting system, segregation of the trading and back office functions, etc. The efficacy of the systems put in place by banks is being constantly reviewed by the RBI through periodical inspections. 

-- Banks have been advised to put in place an independent Loan Review Mechanism, as recommended by the Committee.

-- The public sector banks have been permitted to recruit from the open market or by way of campus recruitment, skilled personnel in areas like information technology, risk management, treasury operations, etc. 

As regards the recommendation in regard to discontinuing the practice of recruitment of officers through Banking Services Recruitment Boards, Govt. may furnish comments.

-- Globally, banking and financial systems have undergone fundamental changes because of the ongoing revolution in information and communications technology. Information technology and electronic funds transfer systems have emerged as the twin pillars of modern banking development. This phenomenon has largely bypassed the Indian banking system although most technologies that could be considered suitable for India have been introduced in some diluted form.

The Committee feels that requisite success in this area has not been achieved because of the following reasons: 
$ Inadequate bank automation.
$ Not so strong commercially oriented inter-bank platform.
$ Lack of a planned, standardised, electronic payment systems backbone.
$ Inadequate telecom infrastructure.
$ Inadequate marketing effort.
$ Lack of clarity and certainty on legal issues and
$ Lack of data warehousing network.

 In pursuance of the recommendations of the Working Group, the Indian Financial Network(INFINET), a wide area Satellite based network using VSAT technology has been commissioned on 24th June, 1999 at IDRBT, Hyderabad which will connect bank branches and RBI Offices in a phased manner.

--- The Monetary and Credit Policy for the year 2000 –2001 proposed to adopt the following broad approach for considering proposals in this area : 

a.    The principle of 'Universal Banking' is a desirable goal and some progress has already been made by permitting banks to diversify into investments and long-term financing and the DFIs to lend for working capital, etc. However, banks have certain special characteristics and as such any dilution of RBI’s prudential and supervisory norms for conduct of banking business would be inadvisable. Further, any conglomerate, in which a bank is present, should be subject to a consolidated approach to supervision and regulation.

b.    Any DFI, which wishes to do so, should have the option to transform into bank (which it can exercise), provided the prudential norms as applicable to banks are fully satisfied. To this end, a DFI would need to prepare a transition path in order to fully comply with the regulatory requirement of a bank. The DFI concerned may consult RBI for such transition arrangements. Reserve Bank will consider such requests on a case by case basis.

-- Mergers between banks and between banks and DFIs and NBFCs need to be based on synergies and locational and business specific complimentarities of the concerned institutions and must obviously make sound commercial sense. Mergers of public sector banks should emanate from management of banks with Govt. as the common shareholder playing a supportive role.

Mergers between banks and between banks and DFIs and NBFCs need to be based on synergies and locational and business specific complimentarities of the concerned institutions and must obviously make sound commercial sense. Mergers of public sector banks should emanate from management of banks with Govt. as the common shareholder playing a supportive role.
A non-banking finance company has since been permitted to merge with a bank. Two banks in the private sector have also merged based on synergies and business specific complementarities.

--- In addition to the two definitions for identifying ‘weak’ banks recommended by the Committee, RBI monitors banks to identify ‘potential weakness’ on the basis of five more parameters (related to solvency, profitability and earnings) as recommended by the Working Group on Restructuring of Weak Public Sector Banks (Chairman : Shri M.S.Verma ).

In respect of weak banks, a bank-specific restructuring programme aimed at turning around the bank by reducing their cost of operation, and improving income levels, has been put in place. 

The recommendation for setting up of a Restructuring Commission has not been considered. However, the Union Budget for 2000 – 2001 has proposed setting up of a Financial Restructuring Authority for a weak or potentially weak bank.

-- The norms with regard to minimum capital requirements for urban cooperative banks(UCBs) have been revised with effect from 1st April, 1998. Implementation of this recommendation on doing away with duality of control over UCBs would involve amendments to State Cooperative Societies Acts. The Government therefore, has to consider.

--- The ILAF (Interim Liquidity Adjustment Facility) introduced earlier has served its purpose as a transitional measure for providing reasonable access to liquid funds at set rates of interest. In view of the experience gained in operating the interim scheme last year, an Internal Group was set up by RBI to consider further steps to be taken. Following the recommendation of the Internal Group, it was announced in the Monetary and Credit Policy Measures in April, 2000 to proceed with the implementation of a full-fledged LAF. The new scheme will be introduced progressively in convenient stages in order to ensure smooth transition. 

-- The minimum maturity of CDs has been reduced to 15 days,

-- FIIs have been permitted to invest in Treasury Bills, vide Monetary and Credit Policy announced in April 1998.

-- In principle approval has been granted for setting up of 10 Local Area Banks (LABs).
-- 48 recommendations of the S.L. Kapur Committee conveyed to banks for implementation. As a further impetus to the flow of credit, banks have been advised that the credit requirement of SSIs having credit limits upto Rs.5 crore, instead of Rs.4 crore, may be assessed on the basis of 20% of the projected annual turnover.

-- The prudential / regulatory norms stipulated by RBI are applicable to public sector banks, private sector banks and foreign banks uniformly.

--- We are moving towards greater transparency and Statutory Auditors of banks are now under the obligation to report on the deviations from adherence to the prudential norms prescribed by RBI in their ‘Notes to Accounts’. 

-- The withdrawal of RBI from the primary market in 91 day Treasury Bills is the long term objective.
-- Public sector banks are encouraged to go to the market raise capital to enhance their capital. Eleven public sector banks have since accessed the capital market for raising additional capital. 


Monday, 11th Apr 2016, 12:29:56 AM

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