Restricting Growth Of Weak Banks First Rung Towards Cac

The Tarapore committee has stated that the strengthening of financial system is the single most important precondition to the move toward capital account convertibility (CAC). In this context, the committee has suggested measures aimed at monitoring the growth of weaker banks so as to temper the impact their growth might have on the banking system.

The committee has noted that some of the weaker banks have been growing at rates faster than the system. Noting the systemic dangers of this, the committee suggested that weak banks be converted into narrow banks.

These narrow banks would have to restrict their incremental resources only to investments in Government securities. In extreme cases of weakness these banks should not be allowed to increase their advances and should have a severe restraint on their liability growth.

The committee felt that such measures were unavoidable if the financial system was to be safeguarded during the move towards CAC.