COMMITTEES RELATED TO BANKING AND FINANCIAL SECTOR

COMMITTEES RELATED TO BANKING AND FINANCIAL SECTOR
Damodaran Committee (2011)
For improvement of customer services in banks
• A guaranteed payment of up to Rs 5 lakh (raised from Rs 1 lakh) under deposit
insurance to an account holder if a bank fails.
• No liability on customer for losses in ATM and online transactions
• Instant blocking of ATM card through SMS for lost/misused cards
• Transition to chip-based card with a photograph
• Automatic update of senior citizen status in core banking solution branch
• Pensioners to be allowed to submit life certificate in any bank branch
• A common toll-free number for all banks, like 100 for police
• A third-party Know Your Customer data bank
• A detailed break-up of service charges for basic services
• Small remittances at reasonable price
• Compensation for delayed return or loss of title deeds in the custody of banks
• Plain vanilla savings account without a minimum balance requirement
• Prepaid instruments worth up to Rs 50,000 for frequent travelers.
• A chief customer service officer for grievance redressal in every bank
Nachiket Mor Committee
For comprehensive financial services for small businesses and low-income
households
• Providing a universal bank account to all Indians above the age of 18 years by
January 1, 2016. To achieve this, a vertically differentiated banking system with
payments banks for deposits and payments and wholesale banks for credit
outreach. These banks need to have Rs.50 crore by way of capital, which is a tenth
of what is applicable for new banks that are to be licensed.
• Aadhaar will be the prime driver towards rapid expansion in the number of bank
accounts.
• Monitoring at the district level such as deposits and advances as a percentage of
gross domestic product (GDP).
• Adjusted 50 per cent priority sector lending target with adjustments for sectors and
regions based on difficulty in lending.
C Rangarajan committee
Financial Inclusion
The committee is of the view that “while financial inclusion can be substantially enhanced
by improving the supply side or the delivery systems, it is also important to note that many

regions, segments of the population and sub-sectors of the economy have a limited or
weak demand for financial services.
In order to improve their level of inclusion, demand side efforts need to be taken including
improving human and physical resource endowments, enhancing productivity, mitigating
risk and strengthening market linkages. However, the primary focus is on improving the
delivery systems, both conventional and innovative.
The essence of Financial Inclusion is to ensure that a range of appropriate financial
services is available to every individual of the country. This should include:
1. Regular financial Intermediation such as Banking which includes basic no frills accounts
for sending and receiving money.
2. Saving Products which are suitable to the pattern of cash flow of the poor household.
3. Availability of the Money transfer facilities
4. Availability of small loans and overdrafts for productive , personal and other uses.
Narasimham Committee
For Banking Sector Reforms
Committee 1(1991)
Reduction in the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR):
• Bringing down the statutory pre-emptions such as SLR and CRR.SLR and CRR
should be reduced to 25% and 10% respectively over the period of time.
• Banks should get some interest on the CRR balanced.
Redefining the priority sector:
• Priority sector redefined to include the marginal farmers, tiny sector, small business
and transport sector, village and cottage industries etc.
• Minimum target of 10% of the aggregate credit for Priority Sector.
Deregulation
• Deregulation of the Interest Rates, so that banks can themselves set the interest
rates for their customers.
Other recommendations
• Asset Classification & defining the Non-Performing Assets (or bad debts)
• Recommendations towards transparency in the banking system
• Setting up tribunals for recovery of Loans, tackling doubtful debts, restructuring the
banks and allowing entry of the new private Banks
Committee 2(1998)
Autonomy in banking
• Recruitment procedures, training and remuneration policies of public sector banks
be brought in line with the best-market-practices of professional banking
• RBI should relinquish its seats on the board of directors of these banks
Reform in the role of RBI
• RBI should withdraw from the 91-day treasury bills market and that interbank call
money and term money markets be restricted to banks and primary dealers
• Segregation of the roles of RBI as a regulator of banks and owner of bank
Pursuant to the recommendations
• RBI introduced a Liquidity Adjustment Facility(LAF) operated through repo and
reverse repos to set a corridor for money market interest rates.
• RBI holding in banks was transferred to Government of India
Stronger banking system
• Merger of large Indian banks to make them strong enough for supporting
international trade
Non-performing assets
• 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. The
option of re-capitalization through budgetary provisions was ruled out
Capital adequacy and tightening of provisioning norms
• Government should raise the prescribed capital adequacy norms. This would also
improve their risk-taking ability.
• Penal provisions should be applicable for banks that fail to meet these
requirements
• Provisioning for standard assets
• 90-day norm for NPAs instead of previous 180 days
P J Nayak Committee
Governance of Boards of Bank in India
• The PSBs must have independent directors who should be elected by the
shareholders.
• Repealing the Bank Nationalization Acts of 1969 and 1980, the State Bank of India
Act, and SBI (Subsidiary Banks) Act.
• Reduce the government’s shareholding in banks to less than 50 per cent in order to
provide a level playing field to public and private sector banks
• Bank Board Bureau (BBB), will decide on management and board-level
appointments in public sector banks and should only comprise of senior bankers,
with no government involvement in decision making.
R Jilani Committee (1995)
Inspection System in Banks
• Broad guidelines to establish accountability for inspectors/auditors should be laid
down
• A copy of the booklet incorporating RBI circulars to be supplied to each
inspecting/audit official by inspection and audit department periodically
• Banks should have system for ratings of its branches on the basis of inspection
reports
• Major irregularities detected during concurrent audit to be immediately taken up
with Head office
• Various test to be carried out to ensure that EDP applications have resulted in
consistent and reliable system for inputting, processing and generation of output of
data
• Entire domain of EDP activities to be brought under scrutiny of inspection and audit
including financial aspect
• Regular checking by inspectors/auditors to verify correctness of information
complied/furnished by branches
Ghosh Committee (1992)
Frauds & Malpractices In Banks
Group A - Recommendations which have to be implemented by the banks immediately
1. Joint custody and dual responsibility of cash and other valuables
2. Rotation of staff/duties
3. Designation of one of the officers as compliance officer
4. Financial and administration powers of officials to be laid down
5. Exercise of caution at the time of opening of new deposit of all types
6. Precautions against theft of cash
7. Precautions in writing of drafts/mail transfers
8. Precautions for averting frauds in letter of credits, guarantees
9. Screening/selection of employees in EDP cell, computer area
10. Standards for fully computerized branches
Group B Recommendations requiring RBI approval
1. Banks to introduce portfolio inspection in critical areas such as credit, investment,
off balance sheet item etc.
2. Periodical movements between bank officials and investigating officials of
CBI/Police
3. Six months prior to retirement officials should exercise their sanctioning powers
jointly with next higher authority
4. Paper used for cheque/drafts should such that any use of chemical for making
material alterations in instrument should be visible to naked eye
Group C Recommendations requiring approval of Government of India
1. Chief vigilance officer should directly refer to CVC, cases having vigilance angle
involving CMD
2. Fraud cases up to Rs. 25000 having involvement of an insider should not be
reported to police where recovery is doubtful
3. Introduce a return of staff members to ensure strict submission of information of
assets and liabilities and proper scrutiny thereof
Group D Recommendations requiring further examination in consultation with IBA
1. BR should not be outstanding for more than 7 days
2. Obtaining photograph of depositors at the time of opening of accounts
Raghuram Rajan Committee
For Financial Sector Reforms
The report is titled “A Hundred small steps”. The report does not limit itself to any
particular segment, rather it covers the overall financial sector. Some of the main
proposals are listed as under.
1. RBI should have a single objective of maintaining inflation within a range and use a
single instrument (repo/reverse repo rate) to achieve the same.
2. Rupee corporate and government bonds market should be opened steadily after
setting up a clear monetary policy.
3. Reforms in Small Finance bank domain like higher capital adequacy norms and
strict prohibition on related party transactions.
4. Liberalize the banking correspondent regulation so that a wide range of local
agents can serve to extend financial services
5. Offer priority sector loan certificates (PSLC) to all entities that lend to eligible
categories in the priority sector
6. Liberalize the interest rate that institutions can charge, ensuring credit reaches the
poor
7. Sell small underperforming public sector banks, possibly to another bank or to a
strategic investor, to gain experience with the process and gauge outcomes.
8. Create stronger boards for large public sector banks, with more power to outside
shareholders, devolving the power to appoint and compensate top executives to the
board.
9. After starting the process of strengthening boards, delink the banks from additional
government oversight, including by the Central Vigilance Commission and
Parliament, with the justification that with government-controlled boards governing
the banks, a second layer of oversight is not needed.
10. Be more liberal in allowing takeovers and mergers, including by domestically
incorporated subsidiaries of foreign banks.
11. Free banks to set up branches and ATMs anywhere.
Rakesh Mohan Committee
Small Savings
1. Benchmarking and Spread Rules: average G-sec yields as the suitable benchmark
2. Rationalization of Existing Savings Schemes: Discontinuance of KVP, NSC,
Deposit Scheme for Retiring Employees (DSRE) and 6.5 per cent (tax free) GoI
Savings Bond 2003. Continuation of PPF
3. Dada-Dadi Scheme for improving the welfare of senior citizens.
Urjit Patel Committee
To examine the current monetary policy framework
• RBI should adopt the new Consumer Price Index (CPI) for anchoring the monetary
policy. Set the inflation target at 4% with a band of +/- 2% around it.
• Monetary policy decision making should be vested in a Monetary Policy Committee
(MPC) that should be headed by the Governor.
• The two schemes- Dependence on Market Stabilization Scheme (MSS) and Cash
Management Bills (CMBs) may be discontinue and the government debt and cash
management must be taken over by the government’s Debt Management Office.
• All fixed income financial products should be treated on par with the bank deposits
for the purposes of taxation and TDS.
• Detachment of Open Market Operations (OMOs) from the fiscal operations and
instead linked solely to the liquidity management. OMOs should not be used for
managing yields on government on government securities.
• Main objective of the committee was to recommend what needs to be done to
revise and strengthen the current monetary policy framework with a view to making
it transparent and predictable.
Vaghul Committee 1987
For Money Market In India
Introduction of commercial paper (CP) / certificate of deposit (CD), Deregulation of
administered interest rates, and activating the secondary market. Call money market
should be purely an inter-bank market and therefore, the restrictions on entry into call
market prevailing at that point of time should continue. The essential rationale for such
recommendation was that freeing of entry into the call market coupled with allowing call
money rates to be determined entirely by market forces at a time when deposit rates of
banks were administered would lead to, it was apprehended, substantial diversion of funds
from the bank deposit segment to the call money market segment which would raise the
cost of funds to banks markedly. Therefore, while the Vaghul Committee decided in favor
of making the call money market a pure inter-bank market, it felt that LIC and UTI which
had been permitted in the market as lenders in 1971 would gradually come out of the
market as other money market instruments develop with wider array of maturities.
Tandon committee
Bank credit to large borrowers
In order to study the modalities of bank credit to large borrowers, and frame suitable
guidelines, the Reserve Bank of India (RBI) constituted a study group in 1974 popularly
known as the “Tandon Committee”. The Committee submitted recommendations in 1975
to introduce discipline both on banks and borrowers, with a view to enforcing better
management of cash, materials and trade receivables. The foundation of the current
methodology of working capital finance in India was laid by these Tandon Committee
recommendations. Upon the opening, up of Indian economy and onset of economic
liberalization, RBI ushered in a more liberal assessment regime in 1997. Banks were given
the option to do away with some of the key components of the Tandon Committee
guidelines, such as methods of lending, maximum permissible bank finance (MPBF), and
excess borrowings. Despite these relaxed guidelines, however, almost all banks in India
either continue to follow the guidelines or use a modified version of them. Tandon
Committee guidelines therefore still continue to form the basis
of assessment methodologies. While other methods, such as the cash budget method and
turnover method, are also used, their use is restricted to certain segments or loan ticket
size.
WCG = Total Current Assets – Trade Payables (Sundry Creditors) – OCL
WCG = Bank borrowings + NWC
The committee suggested three methods for calculating Maximum Permissible Bank
Finance. Only two methods of the three was accepted.
Nayak committee
Assessment of working capital - Turnover method
The Committee was constituted by Reserve Bank of India in December 1991 under the
Chairmanship of Shri P. R. Nayak, the then Deputy Governor to examine the issues
confronting MSE in the matter of obtaining finance. The Committee submitted its report in
1992. Some major recommendations are:
• Give preference to village industries, tiny industries and other small scale units in
that order, while meeting the credit requirements of the small-scale sector;
• Grant working capital credit limits to MSE units computed based on minimum 20%
of their estimated annual turnover whose credit limit in individual cases is up to
Rs.2 crore [ since raised to Rs.5 crore]
• Prepare annual credit budget on the `bottom-up’ basis to ensure that the legitimate
requirements of MSE sector are met in full.
• Extend ‘Single Window Scheme’ of SIDBI to all districts to meet the financial
requirements (both working capital and term loan) of MSEs.
• Ensure that there should not be any delay in sanctioning and disbursal of credit. In
case of rejection/curtailment of credit limit of the loan proposal, a reference to
higher authorities should be made.
• Not to insist on compulsory deposit as a `quid pro-quo’ for sanctioning the credit
• Open specialised MSE bank branches or convert those branches which have a
fairly large number of MSE borrowal accounts, into specialised MSE branches.
• Identify sick MSE units and take urgent action to put them on nursing programmes
• Standardise loan application forms for SSI (now MSE) borrowers
• Impart training to staff working at specialised branches to bring about attitudinal
change in them.
G Gopalakrishna committee
Capacity Building in banks and non-banks
• Approach to capacity building in banks and non-banks
• Enhancing Human Resources Management practices
• Creation of position of Chief Learning Officer in banks and concept of return on
learning
• Strategies for addressing issues of replacement or replenishment of talent in banks
• Training strategy and need for expert trainers to help build capacities
• Coaching and mentoring including mentoring programme for Top Management of
banks
• Entry point qualifications at recruitment stage, development of competency
standards and certification or accreditation in various areas of training
• E-learning as an important constituent for building capacity and imparting training
• Training and learning Infrastructure oriented to banking
• Proposal for setting up a Centre of Excellence for Leadership Development in
banking sector
• Fostering research on skill development in banking sector and evolving a
monitoring framework for capacity development in