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Narrow Banking || SBI Clerk Exam 2018 || Banking Awareness

The concept of narrow banking came in India after submission of the report by the committee on capital account convertibility. It was suggested as a solution to the problem of high NPA’s. The committee proposed to restrict the investment by these banks in government securities only.

Meaning: Narrow Banking is a system whereby a bank place its funds in risk free assets with maturity period matching its liability maturity profile so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets.

Features:

  • Refers to limited banking activity.
  • The banks deal only in deposit mobilization and lending or investing within particular region or in government securities.
  • Proper matching of asset with liability maturity profile is to be done.
  • Bank does not provide term loans, working capital loan, agricultural loan and advisory service.

Advantages:

  • It ensures regular deployment of funds in low risk liquid assets.
  • Banks can overcome the problem of bank failures.
  • It will minimize risk of loss to the depositors and systemize their risks

     

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