'Father of banking reforms': Ex-RBI governor M Narasimham passes away at 94

Former Reserve Bank of India Governor Maidavolu Narasimham, famously known as the father of Indian banking reforms, passed away on Tuesday at the age of 94.

He was born in 1927 and hails from Mydavolu village of Guntur District in Andhra Pradesh.

Narasimham was the 13th governor of RBI and he served as the central bank head from May 2, 1977 to November 30, 1977.

Narasimham was known for his reports on banking reforms in 1991, but his work before that in the area of rural banking is also much appreciated.

For example, the Narasimham committee on rural credit recommended the setting up of Regional Rural Banks, which argued such entities are better suited for meeting the needs of the rural population than the commercial banks or the cooperative banks. The characteristic for RRBs as envisioned by him was of having a rural flavour with commercial outlook.

He wrote the report in a single day, recalled Usha Thorat, former deputy governor, Reserve Bank of India.

"Though I never worked with him, we understood that he wrote the RRB report in 1976 in one day. He felt very strongly that rural banks should have a local feel and local touch, and they should have the professional approach of the commercial bank. This is how the RRBs came into existence,” said Usha Thorat, former deputy governor, RBI.

“He felt very strongly that rural banks should have a local feel and local touch, and they should have the professional approach of the commercial bank,” she said.

The government accepted the recommendations of the Narasimham committee, and passed the Regional Rural Banks Act, 1976, paving the way for the establishment of RRBs in India.

Interestingly, he founded the credit planning cell in RBI in the early 70s, - linking credit to planning and development – which is now known as the monetary policy department.

The reports of 1991 on banking reforms were an important document for the future of the country’s banking sector as the suggestions were pathbreaking and futuristic. The report talked about establishment of a four-tier hierarchy for banking structure with 3 to 4 large banks at the top and at the bottom are the rural banks engaged in agricultural activities. The recommendation of bringing down cash reserve ratio and statutory liquidity ratio was implemented, which unlocked funds with RBI.

Importantly, the committee also recommended that the government's stake in the public sector banks needs to be brought down to 30%. The government can continue to be the dominant shareholder but the banks should operate through their board and not be dictated by the department of financial services of the finance ministry.

Interestingly, many years later, the PJ Nayak committee which was set up to suggest governance reform in public sector banks in 2014, also recommended bringing down government stake below 50% and empowering the board of the PSBs.

Narasimham was the first and so far the only governor to be appointed from the Reserve Bank cadre, having joined the Bank as a Research Officer in the Economic Department. He later joined the government and prior to his appointment as governor he served as Additional Secretary, Department of Economic Affairs.

After his short term as RBI governor, he served as India's executive director at the World Bank and later at the International Monetary Fund (IMF).

YSP Thorat, former chairman of Nabard, pointed out another facet of the visionary policy maker who identified what went wrong with the world’s largest branch expansion plan.

“After 1969, India launched the largest branch expansion programme of the world under the bank nationalization. Yet we staffed it wrongly,” YSP Thorat said.

He said that the basic flaw in the branch expansion programme was human resources.

“In the sense we recruited urban people and posted them to rural centres. And these employees had neither any sensitivity, nor any desire to be posted in rural areas. In many cases they looked down upon the poor farmers. And that was the critical flaw that the rural branch managers of the commercial banks were not attitudinally in sync with the rural aspirations,” he said.

And this is what possibly prompted Narasimham to say that rural staffing combined with commercial bank expertise might work better.

“He saw two models in front of him. The cooperative model which was very close to the people and their aspiration. But not commercially savvy. And the commercial model which was commercially savvy but not close to the people. And then he said can I take the commercial part from the commercial banks and local part from the cooperative model and bring them together. That was the thinking he had in mind at that time, " he said.

Narasimham was awarded Padma Vibhushan award in the year 2000.