ISS Previous Year Paper 2021 GS Solution Question 3(d) Narasimham Committee Reports and Control of NPAs in India

ISS Previous Year Paper 2021 GS Solution Question 3(d) Narasimham Committee Reports and their role in controlling Non-Performing Assets (NPAs) in India's banking sector. Detailed answer for ISS GS preparation.

Narasimham Committee Reports and Control of NPAs in India

ISS Previous Year Paper 2021 GS Solution Question

Q.3(d) Analyse the recommendations of the Narasimham Committee Report I and II in controlling Non-Performing Assets (NPAs) of the banking sector in India.

Answer :

The Narasimham Committees recognized that a sound banking system is essential for economic growth and emphasized measures to improve asset quality and reduce NPAs.

Narasimham Committee I (1991)

The committee recommended:

• Adoption of international prudential norms for income recognition, asset classification, and provisioning.

• Greater transparency in bank balance sheets.

• Reduction of directed credit programs that often resulted in poor loan recovery.

• Strengthening banking supervision and regulatory mechanisms.

• Improving operational autonomy and accountability of banks.

  
  

These measures helped identify bad loans more accurately and improved financial discipline.

Narasimham Committee II (1998)

The second committee focused more directly on NPA management and banking reforms. Key recommendations included:

• Creation of Asset Reconstruction Companies (ARCs) to take over and manage bad assets.

• Strengthening debt recovery mechanisms.

• Raising capital adequacy requirements.

• Mergers and consolidation of strong banks to improve competitiveness.

• Better risk management practices and corporate governance standards.

• Professionalization of bank management.

  
  

Impact on NPA Control

The recommendations laid the foundation for modern banking regulation in India. They improved transparency, strengthened supervision, and encouraged timely recognition of stressed assets.

Subsequent reforms such as the SARFAESI Act (2002), Debt Recovery Tribunals (DRTs), and the Insolvency and Bankruptcy Code (IBC), 2016 were influenced by the broader reform agenda initiated by these committees.

However, despite these reforms, NPAs remain a recurring challenge due to economic downturns, governance issues, and credit risk management weaknesses.

Conclusion

The Narasimham Committees played a transformative role in modernizing India's banking sector and improving mechanisms for NPA management. Their recommendations strengthened prudential regulation, recovery systems, and financial stability, making them a cornerstone of banking reforms in India.