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The age and times of Shri M Narasimham
Read more on - Polity | Economy | Schemes | S&T | Environment
- The man: Shri Maidavolu Narasimham (1927-2021) was a giant in Indian financial sector, and the thirteenth governor of the RBI [from May 1977 to November 1977]. With his demise, an era came to an end.
- His life and times: He was the only governor of the RBI to have risen to the position from the central bank’s ranks, and was most recognized for the role he played in liberalizing India’s banking and financial system in the 1990s. He is recognised as the architect of modern Indian banking, and seen in the banking system today in terms of the struggle to bring about change. The famous Narasimham reports laid the road ahead! (Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998) report)
- What changes arrived: His recommendations led to many changes.
- BIS - The first was bringing in prudential concepts as propounded by the Bank for International Settlements (BIS). These were regarding income recognition, capital adequacy, quality of assets, provisioning, etc. These took time to digest, and the RBI played a stellar role in bringing them in a calibrated manner so that the system was not disrupted. Basel II and Basel III were extensions of the same course. The RBI took time to bring the 90-day concept for recognising non-performing assets (NPAs) so that the system was able to absorb this rule.
- Private banks - He recommended India having more private banks, which was seen as a timely recommendation as the system was typified by public sector banks (PSBs), in the shadow of nationalisation. But the 1990s was a new wind of change in India, and radical ideas were welcome. Getting in new private banks has brought about a technology revolution in the banking sector, helping everyone. Along with this suggestion was the extended frame provided to foreign banks to operate in India. It was a signal that there would be no further nationalisation. In fact, in 2021, the PM of India openly accepted the word "privatisation".
- Interest rates - The interest rates on deposits and loans were to be freed, and it was significant because until that point of time all decisions came from ‘above’. The RBI gradually moved towards giving banks the freedom to fix their rates on the deposits side. But the lending side is once again back to the fold of partial regulation, with the central bank asking them to follow a formula. (a criticism of this approach is that it has led to 'financial repression' of savers in India, with real returns turning negative, as lending rates started reducing steadily)
- CRR & SLR - The reports argued for sharp reductions in the CRR (Cash Reserve Ratio) and the SLR (Statutory Liquidity Ratio) of banks. While banks argue against having a CRR, the system had a rate of 15% in 1989 and again in 1994, after which it has been brought down to 4%. The SLR at its peak was at 38.5% in 1990. The move to lower these pre-emption reserves owes a lot to the recommendations.
- Government securities - The concept of marking-to-market the portfolio of government securities was again a takeaway from the report. This was a way of making them market-oriented and also ensuring that the real value of bonds was accounted for by banks.
- Four-tiered structure of banks - Narasimham had suggested creating a four-tiered structure of banks, which is seen for the past three decades. The tiers would be - large banks that can be globally competitive, regional banks that serve specific purposes, niche banks that cater to communities and new small banks and payments banks. It was strengthened by an RBI committee where differentiated banks were spoken of.
- Weak banks - The identification of weak banks and putting conditions was again a concept from the reports. It is from this that the RBI has drawn the PCA (Prompt Corrective Action) policy. The report suggested ways to tackle such banks and get them out of the mess with narrow banking being an intermediate route.
- Transparency - The reports recommended introduction of transparency in bank accounts. Today, all annual reports include all disclosures and follow fixed formats. It is thus now possible for one to analyse any aspect pertaining to all banks in a uniform manner.
- Mergers - The concept of mergers across the financial sector was envisioned in terms of synergies being created. The report also spoke of mergers between PSBs, which is now a reality.
- Regional Rural Banks RRBs - The Narasimham committee on rural credit recommended the establishment of Regional Rural Banks (RRBs) on the ground that they would be much better suited than the commercial banks or co-operative banks in meeting the needs of rural areas. Accepting the recommendations of the Narasimham committee, the government passed the Regional Rural Banks Act, 1976. A significant development in the field of banking during 1976 was the establishment of 19 Regional Rural Banks (RRBs) under the Regional Rural Banks Act‚1976. The RRBs were established “with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to small and marginal farmers, agricultural laborers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereto”. RRBs are jointly owned by Government of INDIA, the concerned State Government and Sponsor Banks (27 scheduled commercial banks and one State Cooperative Bank); the issued capital of a RRB is shared by the owners in the proportion of 50%, 15% and 35% respectively.
- Recommendations not fulfilled yet:
- Privatisation of PSBs is something that the government is looking at seriously, as per the Union Budget of 2021-22. Banks are being targeted for full disinvestment. Given that PSBs that have been merged are out of this loop, it looks like the candidates would be smaller ones.
- Remuneration factor was something that Narasimham had spoken of for PSBs as recruitment was to be made independent. There has been no attempt here on the pay structure, which is still a bargaining process. The Indian Banks’ Association (IBA) plays a vital role here.
- Priority sector was to be given less importance. The reports recommended reducing the amount of lending that had to go to the priority sector from 40% to 10%. There has been no change in this regard and it looks unlikely that this issue will ever be discussed.
- Deposit insurance - The reports had also recommended differentiated deposit insurance premium for banks. This is notable because banks carrying a higher risk on their lending portfolio would be made to pay a higher premium for cover on their deposits. [This is based on the CAMELS (capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk) score of RBI.] This will be quite appropriate to ensure that banks pay more attention to the quality of assets.
- Summary: The brilliant mind of Shri Narsimham contributed significantly to the reshaping of Indian banking in the decades of liberalisation. Today, Indian economy stands again at a crossroads, due to multiple headwinds. He will be sorely missed.
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