Which of the following was a major recommendation of the Narasimham Committee (1991) in the context of financial sector reforms?
Show answer & explanation
Correct answer: C
Explanation
Solution: The correct answer is Reduction of statutory pre-emptions like CRR and SLR to enhance credit availability.
Explanation:
☛ In August 1991, the Government of India appointed the Committee on the Financial System under the chairmanship of former RBI Governor M. Narasimham to recommend measures for reforming the financial sector.
☛ A major recommendation was the gradual reduction of high statutory pre-emptions, specifically the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR), which had locked up substantial resources of commercial banks.
☛ The reduction was aimed at leaving more funds with banks to meet the credit needs of agriculture, industry, and commerce.
☛ The committee also recommended the deregulation of interest rates, phasing out directed lending, and introducing objective accounting standards.
Extra Exam-Relevant Facts:
☛ Four-Tier Banking Structure: The committee proposed restructuring Indian banks into a four-tier hierarchy, consisting of 3 to 4 large banks with international presence, 8 to 10 national banks, local banks, and rural banks.
☛ Prudential Norms: It recommended adopting Capital Adequacy Norms (aligned with Basel standards) and transparent classification of assets into standard, sub-standard, doubtful, and loss assets.
☛ Debt Recovery: It recommended establishing special Debt Recovery Tribunals (DRTs) to expedite loan recovery.
☛ Private Entry: The committee advocated allowing the entry of new private sector banks and foreign banks to foster healthy competition.
☛ Narasimham Committee II: In 1998, the second committee on Banking Sector Reforms was constituted under M. Narasimham to review the progress of the reforms.
Important One-Liners for Upcoming Exams:
☛ Who is popularly known as the 'Father of Indian Banking Sector Reforms'? → M. Narasimham
☛ In which year was the first Narasimham Committee on Financial Sector Reforms constituted? → 1991
☛ Which committee recommended the establishment of the Board for Financial Supervision (BFS) within RBI? → Narasimham Committee (1991)
☛ What minimum Capital Adequacy Ratio (CAR) was initially recommended by the Narasimham Committee? → 8%
☛ In which year did the Narasimham Committee II submit its report on Banking Sector Reforms? → 1998