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A STUDY ON UNIVERSAL BANKING

INTRODUCTION
It is a well known fact that economic growths implies a long term rise in per capita national
output and such increases are very much associated with drastic and extraordinary changes in
technology, institutional set up, psychological environment, organizations behavior, socio culture
and attitude of common people. For social development economic growth is necessary and for
economic growth industrialization is necessary and for industrial growth efforts, capital and
knowledge are three important elements and among these element capital is the most crucial
component. However, metamorphic environmental developments in and outside the political
boundary and the open market policy with the hedges cocooning the economy has been
abolished by the computer and telecommunication revolution.
The net communications have explored geographical and functional integration of international
financial markets. Further, deregulation of financial market It is a well-known fact that economic
growths implies a long term rise in per capita national output and such increases are very much
associated with drastic and extraordinary changes in technology, institutional set up,
psychological environment, organizations behavior, socio culture and attitude of common
people. For social development economic growth is necessary and for economic growth
industrialization is necessary and for industrial growth efforts, capital and knowledge are three
important elements and among these element capital is the most crucial component. However,
metamorphic environmental developments in and outside the political boundary and the open
market policy with the hedges cocooning the economy has been abolished by the computer and
telecommunication revolution. Deregulation of financial market and intensified competition
among banks and non banking financial intermediaries have minimized the hurdles between
money and capital markets and explored more diversified, organized, multipurpose and
innovative financial institutions functioning in unprecedented dimensions. It has been found that
a wide spectrum of financial intermediaries in money market and capital markets under the
supervision and guidelines of central banks as an apex body has came into existence across the
world to fulfill varied requirements of savers and investors. Notable agencies among money
market institutions engaged principally in providing term financing to investors and

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entrepreneurs are commercial banks, discount houses, acceptance houses and indigenous
agencies and among capital market institutions, insurance companies, venture capitalists, vulture
funds, mutual funds, investment banking, development banking, virtual banking, merchant
banking, mutual banking, and universal banking.
In general perception the term Universal Banking refers to a financial institution offering
commercial as well as investment banking services which also include services related to
savings, loans and investments. But in real practice, institutions which offer a wide range of
financial services, beyond commercial banking and investment and investment banking and
various other activities including insurance are regarded as universal banking. It is like a
coordinated financial super market supplying innovative and multifarious products under one
roof. It is one spot ultimate shopping place for a customer who is willing to deal in several
financial products. It combines the complexities of investment banking with simpler commercial
banking services for individual and companies. In present global scenario universal banking
concept is an innovative high breed banking option and its pronounced business largely
emphasizes in terms of products, customer groups and regional activities. According to the
World Bank, in Universal Banking, large banks operate extensive network of branches, provide
many different services, hold several claims on firms (including equity and debt) and participate
directly in the Comparative Governance of the firms that rely on the banks for funding or as
insurance underwriters.
Globally universal banking is functioning in various forms like In House fully integrated
universal banking which is known as purest form of universal banking. In this form of UB single
institution offers a complete range of banking and other products to the customer. Under this
form banks different departments operate under one roof and perform various activities like,
commercial banking, investment banking, insurance, leasing, etc. in order to satisfy the
consumer need. Under Universal Banking Subsidiary Structure form of UB, there exists a net
work of principal institution and subsidiaries. In general principal institution undertakes both
banking and investment activities and for remaining activities subsidiaries are set up by the bank
and in Holding Company structure form of UB one financial holding company owns both
banking and non banking subsidiaries which are legally separate and individually capitalized and
are allowed by the law.

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HISTORY OF UNIVERSAL BANKING IN INDIA

Historically, India followed a very compartmentalized financial intermediaries allowed to
operate strictly in their own respectively fields. However, in the 1980s banks were allowed to
undertake various non-traditional activities through subsidiaries. This trend got momentum in the
early 1990s i.e., after initiation of economic reforms with banks allowed undertaking certain
activities, such as, hire-purchase and leasing in housing. While this in way represented a
gradual move towards universal banking, the current debate about universal banking in India
started with the demad from the DFIs that they should be allowed to undertake banking activity
in-house. In the wake of this demand , the RBI constituded in December 1997, a working
group under the chairmanship of shri S.H.Khan, the chairman and the managing
director of IDBI (here after reffered to as khan working group
KWG). Th e KWG, wh i c h s u b mi t t e d i t s r e p o r t i n Ma y 1 9 9 8 , r ecommend
ed a pr ogr essi ve move t owar ds uni ver s al banki ng. The Second Nar si nham
Committee appointed by Government in 1998 also echoed the same sentiment. In
January1 9 9 9 , t h e Re s e r v e Ba n k i s s u e d a Di s c u s s i o n P a p e r s e t t i n g o u t
i s s u e s a r i s i n g o u t o f recommendations of the KWG and the Second Narsinham
Committee. Since then a debatehas been going on about universal banking in general and
conversion of DFIs into universal banks in particular. With the opening up of the
insurance sector to the private participation,the debate has gone beyond the narrow concept of
universal banking.





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DEFINITION AND CONCEPTS
The term universal banking has different meanings, but usually it refers to the combination of
commercial banking ( collecting deposits and making loans) and investments banking i.e.
issuing, underwriting and trading in securities, this is the narrow definitions of universal banking.
In a very broad sense, the term universal bank refers to those banks that offer a wide range of
financial services, such as, commercial banking & investment banking and other activities
especially insurance. Its a multipurpose and multi-funcational financial upermarket providing
both banking and financial services through a single window.Universal Banking (UB)
usually takes one of the three forms, i.e., in-house, through separately capitalized
subsidiaries, or through a holding a capital structure. Three well -known countries in
which these structures prevail are Sweden and Germany, the UK & US Under German
banking statutes, all activities could be carried out within the structure of the parent
bank except insurance, mortgage banking and mutual funds, which require legally,
separate subsidiaries. In the UK, a broad range of financial activities is allowed to be conducted
through separate subsidiaries of t he bank. The t hi r d model , whi ch i s f ound i n t he
US, gener al l y r equi r es a hol di ng company structure and separately capitalized
subsidiaries
In cer t ai n count r i es t hes e t ype of uni ver sal banki ng ar e succes sf ul l y f unct i o
ni ng. Universal banking is nothing but broad based bank where you can do commercial
banking,investment, insurance, and other financial business. It is largely found in different
countriesin different forms





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Governmental Policy

After the first phase and second phase of financial reforms, in the 1980s commercial banks began
to function in a highly regulated environment, with administered interest rate structure,
quantitative restrictions on credit flows, high reserve requirements and reservation of a
significant proportion of lendable resources for the priority and the government sectors. The
restrictive regulatory norms led to the credit rationing for the private sector and the interest rate
controls led to the unproductive use of credit and low levels of investment and growth. The
resultant financial repression led to decline in productivity and efficiency and erosion of
profitability of the banking sector in general. This was when the need to develop a sound
commercial banking system was felt. This was worked out mainly with the help of the
recommendations of the Committee on the Financial System (Chairman: Shri M. Narasimham),
1991. The resultant financial sector reforms called for interest rate flexibility for banks, reduction
in reserve requirements, and a number of structural measures. Interest rates have thus been
steadily deregulated in the past few years with banks being free to fix their Prime Lending
Rates(PLRs) and deposit rates for most banking products. Credit market reforms included
introduction of new instruments of credit, changes in the credit delivery system and integration
of functional roles of diverse players, such as, banks, financial institutions and non-banking
financial companies (Nifco). Domestic Private Sector Banks were allowed to be set up, PSBs
were allowed to access the markets to shore up their Cars








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Implications Of Some Recent Policy Measures

The allowing of PSBs to shed manpower and dilution of equity are moves that will lend greater
autonomy to the industry. In order to lend more depth to the capital markets the RBI had in
November 2000 also changed the capital market exposure norms from 5 percent of banks
incremental deposits of the previous year to 5 percent of the banks total domestic credit in the
previous year. But this move did not have the desired effect, as in, while most banks kept away
almost completely from the capital markets, a few private sector banks went overboard and
exceeded limits and indulged in dubious stock market deals. The chances of seeing banks
making a comeback to the stock markets are therefore quite unlikely in the near future. The
move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the
first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a
foot hold in the Indian Markets by investing in willing Indian partners who are starved of net
worth to meet CAR norms. Ceiling for FII investment in companies was also increased from
24.0 percent to 49.0 percent and have been included within the ambit of FDI investment. The
abolishment of interest tax of 2.0 percent in budget 2001-02 will help banks pass on the benefit
to the borrowers on new loans leading to reduced costs and easier lending rates. Banks will also
benefit on the existing loans wherever the interest tax cost element has already been built into the
terms of the loan. The reduction of interest rates on various small savings schemes from 11
percent to 9.5 percent in Budget 2001-02 was a much awaited move for the banking industry and
in keeping with the reducing interest rate scenario, however the small investor is not very happy
with the move. Some of the not so good measures however like reducing the limit for tax
deducted at source (TDS) on interest income from deposits to Rs 2,500 from the earlier level of
Rs10,000, in Budget 2001-02, had met with disapproval from the banking fraternity who feared
that the move would prove counterproductive and lead to increased fragmentation of deposits,
increased volumes and transaction costs. The limit was thankfully partially restored to Rs 5000 at
the time of passing the Finance Bill in the Parliament.



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Booming Indian Retail Banking Sector

Indian Retail Banking Sector, the market research report provides extensive research and
rational analysis on the Indian banking industry. This report has been made to help clients in
analyzing the opportunities, challenges and drivers critical to the growth of the retail banking
industry in India. The forecast given in this report is not based on a complex economic model,
but is intended as a rough guide to the direction in which the market is likely to move. The future
projection undertaken in this report is done on the basis of the current market scenario, past
trends, and rules and regulations laid by Reserve Bank of India (RBI).The report provides
detailed overview of the Indian banking industry by contemplating and analyzing various
parameters, like asset size, income level etc. It helps clients to understand various products
offered by the Indian banking industry and their future scope












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Objective of the Study
The core objective of this study is to explore potential of multipurpose financial institutions /
universal banking in respect to Indian market and their future in long run in deregulated an
intensified competition among banks and form of non banking financial intermediaries. In
addition, will analyze the strength, weakness, opportunity and threat of Universal Banking (UB)
in Indian context

Research Methodology
The study is carried out to make qualitative and comprehensive evaluation of emerging and most
preferred Universal Banking (UB) concept in India. For the purpose descriptive research design
(observational method & case- study method) has been adopted which is based on the secondary
data and the secondary sources of data were the various websites, published annual reports and
literatures of the banking companies, RBI annual report, IMF annual & periodical reports and
academic journals.










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Review of Literature
Literature revues are important for the study as they base on past work on present and forecast
about the future and give study a direction as a north star. In this study it is authentically
undertaken to understand the present status of banking and financial institutions and their overall
impact after transforming into universal banking and their survival in global competitions by
critically examining and evaluating different theories and empirical studies conducted
universally by financial experts and academicians. The Solomon revelations of these studies
indicate that they differ in opinion due to many reasons like global economic condition, nature of
economy, time period of the study, banks futuristic policies and considerations etc. Therefore,
keeping futuristic development in view this study is humble initiative and is designed to
investigate Universal Banking minutely which is relevantly required in Indian capital market.
The outcome of the study will provide insights regarding operational characteristics and
efficiency of banking companies to the end users in the both segments long term and short term
and will also explore new dimensions and will set new parameters to be followed by
others.According to the World Bank that universal banking, large banks operate extensive
network of branches, provide many different services, and hold several claims on firms
(including equity and debt) and participate directly in the corporate Governance of firm that rely
on the banks for funding or as insurance underwriters. Such kinds of banks are very much
common in European countries.
In Germany there has never been any separation between commercial banks and investment
banks andCB accept time deposits, underwrite corporate stocks, and represent as investment
advisors to large corporations. Bank of America CEO Brain T Moynihan thinks the universal
model is the most important and crucial for his business. It is because it gives consumers access
to global information, capital markets, investment advice and basic banking in one place. To be
competitive we have to provide all these services to our customers. With passing through global
recession, universal banking is no longer seems attractive. Its performance is now debatable and
theres been lot of talk in America about the resurrection of Glass Steagall act, a depression- era
law that split investment and commercial banking. Many regulators and politicians see scandals

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such as the LIBOR rate fixing allegations, the volatility of wholesale markets thinks that the
recent loss sustained on credit derivative positions by JP Morgan Chase also unnerves people.
Investors and analysts are now arguing big banks breaking up. CLSA broker and an analyst Mike
Mayo conclude that these companies are worth more dead than alive. Most universal banks with
subscale investment- banking arms will neither find buyers nor will they be able to wind down
these businesses without incurring big losses. Even the financial economist advocated the
modern concept of UB is now having second houghts. Big banks including BofA, JPM, Morgan
Stanley, Citi and Goldman Sachs are facing potential downgrades on their credit rating from
Moodys. Sandy Weill, the man behind the mergers that created Citigroup, the archetypal
universal banking giant, surprised pundits by saying that megabanks should broken up. Similar
kind of suggestions was given by former chairman of Citigroup John Reed and Richard Parsons
and David Komansky a former chief executive of Merrill Lynch. Mervyn King, the governor of
the Bank of England said that he saw real merit in pursuing the separation of this utility- type
banking from investment banking. BaFin, Gernanys national watchdog and Deutsche Banks
home regulators are purposely examining the case for segregating the two types of business as
well.










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Utility of Universal Banking

Universal banking concept due to its effective features, efficient economic services, high output,
lower cost and better products and offerings has gained stupendous success and became popular
all over the world in short period of time. In global scenario financial institution have freedom to
choose the size and products mix and offering of its operations and activities to optimize the use
of their available resources. Its large size and range of operations provide economy of scale and
greater scope for better utilization of resources. Universal banking enjoys advantage of avoiding
wasteful marketing duplication, cost less marketing research, concentrated customer feedback
and development. In addition, large scales of operational activities enable the institution to
optimally utilize the modern information technologies which make it more effective and
competitive. In comparison to specialized financial institutions UBs are sufficiently equipped to
undertake verities of business according to demand by shifting the surplus resources within the
organization without substantial cost. It single window offering of financial products and
services also consolidate its relation with customers which ultimately result growth in business
as customer prefers to do business with universal banks because they gets services at one place.









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Global View Regarding Universal Banking
In respect of growing economic liberalization, globalization, financial deregulation and
digitalization, competitiveness has increased in almost every sector of the economy including
financial sector. Financial institutions in order to protect and consolidate their presence and
market share, to ensure future growth, to arrest performance deterioration, to avail the advantage
of emerging opportunities, to retain the existing customers and to attract new customers are
offering wide array of customized products and services in convenient atmosphere at economical
rate under one roof since the beginning of 20th century. Due to Glass- Steagall Act, 1933 it
became impossible for the organization to have combined financial activities. The Act prohibited
banks for combining investment and commercial banking activities due to serious conflict of
interests of commercial and investment banking which ultimately slowed the growth of such
banks and financial institutions. But banks in the USA started adopting the system in the late
1990 and Citigroup the financial giant took the lead in this regard under the existing Glass-
Steagall Act. Universal banking in Europe is traditional and principal financial institutions in
these countries offer entire range of banking services. Continental European banks are normally
engaged in depositing, real estate and other related lending, foreign exchange, trading and
underwriting. UB in France, Germany and Switzerland played instrumental role in maintaining
the safety of financial system and also protected Central bank against the excessive demands as
the lender of last resort due to their long presence, practices, experience and expertise. In
countries like Australia, Austria, Finland, France Germany, Hong Kong, Denmark, Sweden and
Poland banks are permitted to undertake in-house commercial banking and investment banking
business. But countries like U.K, Brazil, Mexico, Japan, Canada, Korea, New Zealand, Norway,
Netherland, and Thailand have adopted conglomerate route by setting subsidiaries to perform
diversified business activities. Accept Japan and Korea banks in these countries can also promote
insurance business through their established subsidiaries. The Anglo- Saxon countries and Japan
later adopted Continental European System of UB. In China depositing and lending was the
central business activity but big and ambitious commercial lenders are now opting non banking
financial business territories of trust companies and equity funds and in coming time UB will
become the new hallmark of Chinese financial market. Swiss banking system works as UB

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system, all the banks provides all kind of banking services like credit / lending business, assets
management and investment financial analysis.












Source: The Enduring Marriage of Investment and Commercial Banking Aug 18th (2012)







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Emergence of Universal Banking in India
After adoption of liberalization, privatization and globalization India government adopted new
economic policy in order to become competitive and world class global market. Thus, under
pressures of international financial liberalization policy correction were made and finance
adopted to match the pace of growth, to consolidate and improve their competitive position in
both domestic and global marketplaces which was herculean task. As Indian commercial banks
were mostly government owned and follows British banking norms and operates in protected
onomy. In highly administrated regime discretion of management was limited due to which risk
parameters in general were hazy and not quantifiable.
Further, astonishing and stupendous growth of banks and banking operations during post
nationalization period created operational inefficiency and irregularities which resulted losses of
control over widely spread branches and lead rise in operational cost, accumulation of degraded
quality of assets, decline in profitability, high monitoring arrears and reconciliation. Due to all
these inefficiency competitive effectiveness of banks was at low ebb. Customer care and services
was mirage and they were most dissatisfied relative of administrative banks. During the period
Indian financial strength, operational efficiency and effectiveness were not up to international
standard and thus it became obvious for policy-makers to introduced intermediaries in order to
bring Indian financial market at par with international standard.
To cater the need of growing demand of long term resources at concessional terms Indian
financial institutions comprising Development Financial Institutions (DFIs) and Refinancing
Institution came into existence and short term business were catered by commercial banks in . In
present highly volatile and competitive domestic & global market, ruled by finicky customers
and frequently changing demands has made operation of specialized institutions very difficult.
Due to continuous growth in NPAs, drastically declining profitability and dearth of avenues for
the financial institutions in the wake of declining market sentiments it became impossible for
them to make change in their operation according to the demand without incurring substantial
risks of future. Thus, in respect to equate global standard of financial product and services, to
improve customer services, to minimize the gap, to improve the performance of both categories
of financial institutions, to make them self reliant, to strengthen the banking system and

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improving their performance parameter and profitability, the RBI, has set a vision and policy. To
fulfill the vision and the gap under these prevailing circumstances acquisition of a universal
banking (UB) structure was considered an effective and strategic mechanism. Further, danger of
administrated banks survival speeded the processes. It has been considered by the policy makers
that emergence of universal banks will accelerate economic growth as it assists in strengthening
the alliance between corporate and banks. It has also been considered that a movement into
universality is likely to promote consolidation in a healthy manner and hence should be
encouraged for the betterment of overall economical growth. In order to adopt universal banking
as an alternative to administrated Indian banking the problem of rationalizing and harmonizing
the relative roles of these existing institutions needed to be strategically defined by the
government and RBI which is an uphill task and required perspicac for
(a) how DFI will raise long term resources at reasonable cost in competitive market
(b) can short term resources through traditional banking route help the DFIs
(c) is conversion of DFIs into universal banking due to existing problem and growing
competition faced by them
(d) how DFIs will fulfill legal requirement of entry conditions which are applicable to the banks
in case of conversion into universal banking
(e) minimum and maximum transition time period and approach
(f) DFIs if converted then what would be the appropriate regulatory regime for universal banks
g) what kind of product and services DFIs and commercial banks will provide after converting
into universal bank
(h) up to what extent DFIs and commercial banks are capable to carry on universal banking
activities in open competition. To achieve holistic vision and to evolve an effective, efficient,
resilient, and vibrant, customer oriented financial system acquisition of a "universal banking by
converting FIs nd commercial banks has been endorsed by the policy makers and for the purpose
Reserve Banks of India constituted working committee under Shri Narsimaham and later
constituted working group on December 8, 1997 under the chairmanship of Shri S.H. Khan to
look into the issue and bring more clarity in the respective roles, structure and operation of DFIs

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and commercial banks for greater harmonization of facilities and obligation and recommend
changes to strengthen the organization, human resources, risk management practice and other
relevant issues in the wake of capital account convertibility.
After extensive analyses of the Indian financial market and existing market players under all
circumstances and futuristic probabilities recommendation were made and later final policy been
drafted and implemented. Both the committee recommended for the betterment that the approach
to adopt universal banking should be made keeping domestic and global market; experience and
requirement; there should be only two categories of financial institutions in term of institutional
structure of the capital market viz., banks and non banking financial intermediaries (NBFCs), in
long run depending upon the choice DFIs will have to convert itself into universal banks or
NBFCs, in the prevailing institutional infrastructure DFIs will be enjoying the special niche until
the long term debt market improved in term of liquidity and depth, the DFIs under the privilege
of freedom can remain DFIs and question of their transformation into bank will be time bond and
should be transformed within specified period of time of five years after detailed examination by
the RBI on case to case basis, permission to set up fully owned subsidiary could also be
considered by RBI if in case DFI chose to promote banking services by itself through a wholly
owned subsidiary route, DFI would be categorized as a NBFC if it failed to acquire a banking
license within stipulated period of time, banks and DFI can go for positive and lucrative mergers.
Recognizing the overlapping and undue interference of regulation and regulatory body the Khan
committee suggested that to ensure uniformity in regulatory treatment distinct and effective
regulations should be established to supervise and coordinate the activities of the multiple
regulation
In the year 2000 the issue of universal banking (UB) resurfaced when ICICI discussed with RBI
about the time frame and possible option for transforming itself into a universal bank. RBI also
later spelt out to Parliamentary Standing Committee on Finance and its proposed policy for UB
in which it allowed domestic financial institutions to become universal bank case by case.
Further, RBI asked interested FIs to convert itself into a universal bank and for the discussion
and consideration submit their plan for transition. The submitted plan should be prepared to fully
conform to all prudential, regulatory and supervisory norms which are applicable to banks over
the proposed period.

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Present Status of Universal Banking in India
Keeping the recommendations of Narsimaham committee and of Khan working group (KWG),
RBI facilitated DFIs and commercial banks through legislative amendments to undertake the
diversified financial activities. To avail the opportunity and to dominate the market position,
number of banks set up subsidiaries for merchant banking, mutual fund and leasing along with
commencing factoring and securitization. Thus PSBs assumed the character of UB during the
post reform period and SBI, Allahabad Bank, Panjab National Bank, Bank of Broda, Uninion
bank of India, Oriental Bank of Commerce became pioneer under different categories. Among
private sector banks during the initial period, the ICICI bank, Development Credit bank Ltd.,
HDFC bank Ltd., Kotak Mahendra bank have adopted aggressive approach toward universal
banking and they transformed themselves from term lending into virtual universal bank in
respect to provide corporate and retail financial services like lending activities, life and general
insurance, personal fianc, investment banking, private equity, international banking, mortgages,
consumer credit, retail credit, credit cards etc. For the purpose they entered into strategic alliance
with several foreign giant insurance companies and banks to sell their products. ICICI and IDBI
adopted merger route to convert themselves into universal banks.










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The Road Ahead To India
Universal banking is no longer seems attractive. The financial economist advocated the modern
concept of UB which offer the benefit of diversification, and enable banks to offer a full range of
services to their clients are now having second thoughts. Now the global experience in regard to
UB is varying. It has existence in different from in different part of the world. In some countries
it prohibited commercial banks from selling insurance products, investment banking activities,
taking equity position in borrowing firms etc. The sole idea was to mitigate risky behavior by
restricting CB to their traditional activity of accepting deposits and lending. Market research in
respect to UB impact has revealed different consequences depending upon nations economical
circumstances and customer perception. In emerging economy like India some commercial
economist argue that approach of adoption UB is very slow and some suggest for steady
approach. Some question that, should India can have UB if yes then from when. Some say that
when UB are failing in developed economy, can they survive in emerging economy. But apart
from all emerging thoughts, in India it still hold high esteem and customers are preferring one
stop supplier for all financial products and activities, like deposit, term loans, insurance banking
etc. It save transaction and other related costs and comparatively increases the speed of economic
activity in general. Through effective, protected, consumer prone and futuristic regulation
universal banking can be promoted with the expectation that it will ultimately benefit the entire
market participant, including them and will be able to compete in free market. FIs must be
addressed about
the salient operational and regulatory issues of RBI of conversion into a universal bank. For
better control regulatory body and policy makers have to justify the distinction between maturity
and duration. It is important because DFIs are major supplier of term finance which are of longer
duration and carry low interest rate with clearly defined maturity period that could be between 3
years to 7 years and banks provide short term finance with variably high interest rate and
generally do not have definite maturity dates. It will be wise for India to transform DFIs into
commercial banks in phased manner as its transition path contains several operational and
regulatory issues.


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Strengths, Weaknesses, Opportunities and Threats (SWOT) of Universal
Banking:

Strength:

Economies of Scale: the biggest advantage of universal banking is greater economic efficiency
which enables them to exploit economies of scale by improving spread, higher output with better
and diversified product range and low operating cost.

Diversion of Surplus
Through diversification of activities bank can use its overall potential expertise optimally in
providing different kind of services and can reduce cost by performing all functions by one entity
rather than under separate bodies.

Optimally Utilization of Resources
Banks operating different function under one roof is advantageous. It can collect information like
market trends, risk and return analysis of clients portfolios etc and this information can be
further used to pursue other activities in order to generate additional business with clients
through minimum efforts.

Advantage of Brand Name in Marketing:
Bank with established brand have wide network of its branches which become active point for
promoting products like insurance, Mutual funds etc. as branch will act as a parent company or
source and will help bank to reach remotest area without any external support.

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One Point Shopping:
The idea of one shopping point helps customers as well as banks in saving transaction and other
related costs and improvises the economic activities to a great extent which ultimately
advantageous to all participants..

Pro Investors Environment and Activities:
Adopting universal banking will lead to diversification of business activities which is ultimately
related to customers and thus required investors friendly environment. Apart from this basic,
another manifestation of UB is banks holding stakes in firms. Its equity holding in borrower
firms indicate health of the firm to others investors and being a lending bank it have an
advantage to monitor the firms activities.












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Weaknesses:

Regulatory Obstacles:
The road of UB is not smooth but has many regulatory obstacles which are the real hurdles and
will hamper its growth. The different regulatory requirement of Banks and DFIs, distinction
between maturity and duration, their conversion period, funds can be kept as cash reserves by
FDIs etc., needed careful examination.

Complex long term Lending
Converting into Universal Banking will diversify and increase business opportunity but project
which have long gestation period like project and infrastructure finance required long term
borrowing which requires permission, market standing, expertise to generate and control long
run funds.
NPA a perpetual Problem:
The most serious problem to all banking and financial institution is controlling the bad loans or
non performing assets (NPA). Generally most of the NPAs come out of commodity sector loans
and advances, such as textile, steel and chemicals etc. Using technology cannot solve the
problem but it required proper appraisal and overall analyses by DFIs and banks before and after
lending and proper use of funds and efficient working capital control by the fund users.
Universal banking will add fuel in NPA growth due to its expansion and diversification in
activities without skilled and efficient manpower.





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Opportunities:
Improvise Proficiency and productivity: cross the political boundary and become universal.
The main focus will be ultimate profit rather than size of balance sheet. To increase the profit
margin banks will prefer more of fee based opportunities than mobilizing deposits which will
also save cost and paying interest on deposit. Being part of free economy and to survive with
surplus banks have to improve their efficiency and productivity, which will ultimately results in
new financial products and services

Global Presence and Market: In comparison to global giant financial institution Indian banks
are far behind in terms of total asset and net worth. State bank of India is the only bank which
has managed place in the top 100 banks list of Fortune 500 based on market value, assets, sales
and profit. It has also managed II rank in Forbes 2000 list of all Indian companies. Most of the
top 10 banks in the world have much larger asset based and capital than entire Indian banking
sector. To compare and to secure better position in top 100 banks in the world Indian banks has
to multiply their operation volume many fold. Traditional banking operation cannot make any
difference to enhance overall profitability universal banking with wide range of financial
services clubbed with commercial banking functions like factoring, mutual fund; credit cards,
retail, personal loans, merchant banking etc. became essential.

Elimination of Financial Inequality and Apartheid: Revelation of a study conducted by
Chennai based association, Scientific Research Association for Economics (SRA) that
irrespective of large number of branch network existence in rural and urban areas, still society
lowest base like fruits and vegetable vendors, laundry services, provision stores, petty shop and
tea stalls etc., are unable to avail advantage of banking services. They become victim of money
lenders, pawn brokers etc. This is due to banks policy which is prone toward big entrepreneurs
and do not want to lend entrepreneurs of small strata. This discrimination can be easily
controlled with the help universal banking retail and personal banking services.


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Threats:

King of Financial Ring:
Universal banking is presentation of banking system in modified and different form. It is
legitimate marriage of Development Financial Institutions (DFIs) and commercial banks which
in relation transformed into universal banking. Mergers and acquisitions play important role in
establishing universal banks which is possible only with financial soundness. The biggest
problem will be their size which will put the economy in a problem larger the banks, the greater
the effects of their failure on the system. Size wise universal banks will be the largest banks;
their assets base, their income level and profitability make them financial empire which
ultimately leads to monopoly and price distortion by manipulating interests of the bank for profit
motive instead of social motive. With sound financial status universal banks will develop holding
in other banks and indirectly will control financial business which will ultimately convert
universal banks strength into weakness. Due to their diversified expansion the economy of scale
will become degradation of products quality. If UB did not managed its business prudently then
deposit rates could shoot up and thus impact their margin of profits. To increase profit margin
bank will switch toward riskier business which will affect assets quality and ultimately result in
disintermediation and securitization of banks business.









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Salient Operational and Regulatory Issues for FIs to Convert into a Universal
Bank

Minimum Reserve Requirements:
In order to convert into universal banking it is mandatory under Section 42 of RBI Act, 1934,
and Section 24 of the banking regulation Act, 1949, respectively for FIs to comply with the cash
reserve ratio and statuary liquidity ratio requirements.

Permissible Operational Activities:
All the activities which are not permissible for a bank under Section 6(1) of the B. R. Act, 1949,
have to be stopped or divested by the FIs (if undertaken) after its conversion into universal bank.

Disposal of NPA as per Act:
After converting into universal bank all the immovable property acquired by the FIs is required
to be disposed of within given period of time (of 7 years) from the date of acquisition in term of
Section 9 of the B.R Act.

Composition of Expert & Qualified Board:
After conversion into a universal bank it will become necessary for some FIs to change the
composition of the board of directors in order to ensure the compliance with the provisions of the
Section 10 (A) of the B.R Act, which requires that at least 51% directors must have expert
knowledge and experience.


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Prohibition of Floating Charges on Assets:
Banking companies are not permitted to create any floating charges on the undertaking or on any
property of the company until and unless it is certified by the RBI as required under the Section
14(A) of the B.R Act. Thus any floating charges over its assets after its conversion into a
universal bank if created by FIs would require ratification by the RBI under the Section of 14(A)
of the B.R. Act.

Kind of Subsidiaries:
Section 19 of the Act permits a bank to have subsidiaries as permitted under the Section 6(1) of
B.R. Act. Thus, if any existing subsidiaries of FIs are indulged in any activity which are not
permitted under the Act, then it would become necessary for the FIs to delink itself from such
subsidiaries or activities if want to convert itself into universal bank.

Statuary Investment Limit:
In order to secure compliance FIs have to divest excess holdings of equity investment held by it
in accordance to the provisions of Section 19(2) of the B.R Act, which prohibits a banks to hold
excess to the limits of 30 percent of the paid up share capital of that company or 30 percent of its
own paid up share capital and reserves, whichever is less on its conversion into a universal bank.

Coordinated Lending:
Section 20 of the B.R Act prohibits grant of loans and advances by a bank on securities of its
own shares or grants of loans or advances on behalf of any of its directors or to any firm in which
its director or manager or employee or guarantor is interested. The compliance with these
provisions would be mandatory after conversion of an FI to a universal bank.

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Statuary Licensing:
To carry any banking business in India after converting into universal bank, it is mandatory of
FIs to obtain a banking license from RBI under Section 22 of the B.R. Act.

Obligatory Branch Network:
An FI, after converting into a universal bank would have to comply with the extant branch
licensing policy of RBI under which it is mandatory for a new bank to allot at least 25 percent of
their total number of branches in rural and semi urban areas.

Assets in India:
Under the section 25 of the B.R. Act an FI after its conversion into a universal bank mandatorily
require to ensure that at the close of its business on the last Friday of every quarter its total assets
held in India are not less than 75 percent of its total demand and time liabilities in India.

Annual Reports and its Statuary Format:
FI after converting into universal bank have to publish its balance sheet and profit and loss
account in the format as set out in Third Schedule, as prescribed for banking companies under
Section 29 and Section 30 of the B.R Act.

Chief Executive Officers and their Managerial Remuneration:
Appointment and remuneration of Chief Executives Officers have to be done according to the
RBI guidelines. In case of conversion into universal bank it requires review and approval of RBI

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in terms of Section 35 B of the B.R Act. Through this Sections RBI fix remuneration of the
Chairman and Managing Director of a Bank considering the profitability, net NPAs and other
financial parameters. This Section clearly dictates that prior approval of RBI is must for
appointment of Chairmen and Managing Director

Deposit Insurance: It is statuary obligation on an FI, to comply with the requirement of
compulsory deposit insurance from DICGC (as applicable to the bank) up to a maximum of Rs.
1 lakh per account on its conversion into a universal bank.

Authorized Dealers and Required Licence: Some FIs to undertake transactions necessary
for or incidental to their prescribed functions have to take or hold restricted AD licence from
RBI, Exchange Control Department. On their conversion into a universal bank they become
eligible for full fledged authorized dealer licence and would also attract the full rigour of the
Exchange Control Regulations Applicable to the banks (subject to amendments time to time)
including prohibition on raising resources through external commercial borrowings.

Lending to Priority Sector: After converting into Universal banking it will become applicable
on FIs to fulfill the obligation of lending to the priority sector up to the prescribed percentage of
their net bank credit.

Prudential Norms: The RBI prudential norms applicable to all the financial institutions in
India would be no longer be applicable on FI after their conversion into Universal Banking but
the norms which are applicable to banks would become applicable on FI and it will be fully
complied with.


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THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT
COUNTRIES

Universal banks have long played a leading role in Germany, Switzerland, and other Continental
European countries. The principal Financial institutions in these countries typically are universal
banks offering the entire array of banking services. Continental European banks are engaged in
deposit, real estate and other forms of lending, foreign exchange trading, as well as underwriting,
securities trading, and portfolio management. In the Anglo-Saxon countries and in Japan, by
contrast, commercial and investment banking tend to be separated. In recent years, though, most
of these countries have lowered the barriers between commercial and investment banking, but
they have refrained from adopting the Continental European system of universal banking. In the
United States, in particular, the resistance to softening the separation of banking activities, as
enshrined in the Glass-Steagall Act, continues to be stiff. In Germany and Switzerland the
importance of universal banking has grown since the end of World War II. Will this trend
continue so that universal banks could complete lyoverwhelm the specialized institutions in the
future?

Microcredit and the Web

The principles of microcredit have also been applied in attempting to address several non-
poverty-related issues. Among these, multiple Internet-based organizations have developed
platforms that facilitate a modified form of peer-to-peer lending where a loan is not made in the
form of a single, direct loan, but as the aggregation of a number of smaller loansoften at a
negligible interest rate. There are several ways by which the general public can participate in
alleviating poverty using Web platforms.

Lend to micro-entrepreneurs:
Kiva.org is the first micro-lending website that enables an individual to lend money to a micro-
entrepreneur in the developing world through a microfinance institution. As of November 2008,
over 100 field partners have collaborated with Kiva, dramatically extending its scope and reach.

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Invest in microcredit securities:
MicroPlace.com, a wholly-owned subsidiary of eBay, was launched in October 2007.With
Micro place, retail investors in the US can buy securities issued by security issuers. Therefore,
Micro Place is tapping into the socially responsible investment world and can attract larger
capital to microcredit. Deutsche Bank estimates that $250 billion is needed to raise enough
capital to get it into the hands of the one billion working poor who could benefit from
microcredit. While the US gave $303 billion in charity to all causes, they invested $2.4 trillion in
socially responsible investments.

Guarantee loans to micro-entrepreneurs:

United Prosperity will enable an individual to guarantee a loan to the micro-entrepreneur they
choose to connect and support. The guarantee allows the microfinance institution to raise funds
in local currency from local banks and make a loan to micro-entrepreneurs. Since the guarantee
is only for a part of the loan amount, the guarantee allows the guarantors to multiply the impact
of their money.

Contribute to micro-entrepreneurs:

Woke(lending to China) allows contributors to contribute towards micro-entrepreneurs they
choose to connect and support. Since the contribution is a donation, contributors in the United
States may also get a tax deduction.

Ensure microcredit reaches the poorest families:

The Microcredit Summit Campaign brings together microcredit practitioners, advocates,
educational institutions, donor agencies, international financial institutions, non-governmental
organizations and others involved with microcredit to promote best practices in the field, to
stimulate the interchanging of knowledge, and to work towards reaching the following goals:
Working to ensure that 175 million of the world's poorest families, especially the women of

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those families, are receiving credit for self-employment and other financial and business services
by the end of 2015.
Working to ensure that 100 million families rise above the US$1-a-day threshold adjusted for
purchasing power parity (PPP) between 1990 and 2015.

In the developed world

Microcredit is not only provided in poor countries, but also in one of the world's richest
countries, the USA, where 37 million people (12.6%) live below the poverty line. Among other
organizations that provide microloans in the US Grameen Bank started their operation in New
York in April 2008. According to economist Jonathan Murdoch of NewYork University,
microloans have less appeal in the US, because people think it too difficult to escape poverty
through private enterprise. Efforts to replicate Grameen-style solidarity lending in developed
countries have generally not succeeded. For example, the Cal meadow Foundation tested an
analogous peer-lending model in three locations in Canada, rural Nova Scotia and urban Toronto
and Vancouver, during the 1990s. It concluded that a variety of factorsincludingdifficulties in
reaching the target market, the high risk profile of clients, their general distaste for the joint
liability requirement, and high overhead costsmade solidarity lending unviable without
subsidies. However, debates have continued about whether the required subsidies may be
justified as an alternative to other subsidies targeted to the entrepreneurial poor, and Van City
Credit Union, which took over Cal meadows Vancouver operations, continues to use peer
lending.








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Criticism

Gina Neff of the Left Business Observer has described the microcredit movement as
a privatization of public safety-net programs. Enthusiasm for microcredit among government
officials as an anti-poverty program can motivate cuts in public health, welfare, and education
spending] Neff maintains that the success of the micro credit model has been judged
disproportionately from a lender's perspective (repayment rates, financial viability) and not from
that of the borrowers. For example, the Grameen Bank's high repayment rate does not reflect the
number of women who are repeat borrowers that have become dependent on loans for household
expenditures rather than capital investments]
Studies of microcredit programs have found that women often act merely as collection agents for
their husbands and sons, such that the men spend the money themselves while women are
saddled with the credit risk. As a result, borrowers are kept out of waged work and pushed into
the informal economy.

Many studies in recent years have shown that risks like sickness, natural disaster and over
indebtedness are a critical dimension of poverty and that very poor people rely heavily on
informal savings to manage these risks It might be expected that microfinance institutions would
provide safe, flexible savings services to this population, butwith notable exceptions like
Grameen IIthey have been very slow to do so. Some experts argue that most microcredit
institutions are overly dependent on external capital. A study of microcredit institutions in
Bolivia in 2003, for example, found that they were very slow to deliver quality micro savings
services because of easy access to cheaper forms of external capital of funds for microcredit
institutions in most developing nations. Because field officers are in a position of power locally
and are judged on repayment rates as the primary metric of their success, they sometimes use
coercive and even violent tactics to collect installments on the microcredit loans. Some loan
recipients sink into a cycle of debt, using a microcredit loan from one organization to meet
interest obligations from another. Also, counter to the original intention of the microcredit
system to empower women, one of the effects of an infusion of cash into local economies has
been to increase dowries, with women forced at times to take microcredit loans as the only
means to pay these increased dowries for their daughters Bangladesh's former Finance and

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Planning Minister M. Saifur Rahman charges that some microfinance institutions use excessive
interest rates.
In recent years, there has been increasing attention paid to the problem of interest rate disclosure,
as many suppliers of microcredit quote their rates to clients using the flat calculation method,
which significantly understates the true Annual Percentage Rate. There are other related
criticisms, in the corresponding section, within the article on microfinance.

Changing people's attitudes towards borrowing will be the key togrowing this
sector

Borrowing for consumption, such as to purchase items like furniture, TVs and other consumer
durables is often seen in a negative light, whilst borrowing to invest in houses, property and
businesses is viewed as being more responsible. Although there has been a small shift in recent
years in attitudes towards borrowing, particularly for purchasing vehicles, it appears to be simply
evidence of improving one's social status. Further shifts in norms towards borrowing for other
purposes will likely change over time as newer generations have expressed interest in borrowing
for items such as motos and household goods. One of the biggest shifts that needs to take place
for an expanded consumer finance sector is the banks having greater confidence in the
enforcement of loan contracts. The government has moved positively in this direction and has
ratified the secured transaction law, which allows banks and other financial institutions to take
registered security over moveable assets such as cars. Nevertheless, it will likely take some more
time before banks fully embrace this alternative security structure and have confidence that
courts will enforce security arrangements. From an investment perspective, there have been few
offerings to the market as a suitable alternative to property. This is primarily due to the generous
returns property has provided over the last few years and lack of market-based instruments such
as shares. With the planned stock market, this will enable investors an alternative to property, but
investing in stocks does come with higher risks. The consumer finance sector has seen good
growth over the last few years, and as financial literacy improves and banks expand their
products, the consumer will ultimately benefit from the range of services they can choose from.

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Conclusion
Finance and society are two side of a survival coin. Under the growing commercialization,
universalization and globalization numerous financial products and services have emerged and
developed perpetual relation in all sphere of life. With fast moving economies and growing
economic appetite it became paramount for banks to adopt matching pace in order to fulfill the
global social and economical needs. It has been found that in many developed economies
universal banking have proved their importance and responded efficiently to the customer
demand and played vital role in economic development and served as an importance source of
external fianc for enterprises. Indian financial sector is orthodox and very much influenced by
the British rules and is relatively banking oriented and are been the primary supplier of financial
services. But now banking scenario in India has changed due to globalization and strategy of
universal banking became dominant practice. To meet the economical obligation in changing and
diversifying universal financial galaxy, the Indian banking industry adopted the philosophy of
big size fits well and thus financial conglomerates through mergers and strategic acquisitions
among bank and non banks have emerged and implicitly conveys the futuristic fact. In this paper,
an attempt has been made to explore potential of multipurpose financial institutions / universal
banking in respect to Indian market and their future in long run in deregulated an intensified
competition among banks and form of non banking financial intermediaries and in addition, have
analyzed the strength, weakness, opportunity and threat of Universal Banking (UB) in Indian
context.
The study found that universalisation contributes to efficiency save cost but not significantly.
The study found that universally very few universal banks have investment banking arms with
enough strength to stand on their own. After financial crises the investment banking arms of
large size international commercial banks dominated the key market such as bonds, currencies
and commodities due to decline in pure wholesale banks. It is found that private universal banks
have higher efficiency and productivity in urban area due to providing large number of
diversified services and financial products under one roof but have limited penetration in semi
urban and remote area and paying high cost which has adversely effected their growth. Social
sector banks on other hand have better penetration and advantage of geographical spread but
with high cost and NPA which impacted its margin and growth. It is found that private, foreign

34

and public sector banks have conflict of interest. Private and foreign banks have profit motive
and public sector banks have social motives and thus have distinct approach and consequences. It
is found that most of the universal banks with subscale investment banking arms will not be in
position to find buyers nor they will be in position to wind down their business without incurring
losses due to the contract in which they have entered that produce risk to the banks such as swaps
or other derivatives which can last 20 years or more. Such positions and situations are not easily
managed and their creators are forced to maintain hedging or managing the risks. It is also found
that at a time of winding down the business it is harder to attract and retain investors and
employees. Such kinds of problems suggest regulators ought to look for more subtle
interventions than simply carving banks up. Further regulators have to specify how big
investment banks can be compared with commercial banks.
Apart from all regulatory shortcomings and odds, Indian financial market have untapped
potential and have space for all competitive banks to grow. Indian banking sector day by day
becoming more competitive, efficient and innovative in comparison to multinational giants. The
study concludes with the fact that concept of supermarkets / multipurpose financial institutions /
universal banking is progressive and competitive. UBs have played, are playing and could play a
significant role in nations economic and social development and their competition will be
advantageous to the end users. Future of such banks in long run deregulated and in intensified
competition is expected to be safe.








35

Recommendations
Generally it is found that society trust public sector banks in comparison to private or foreign
banks. Thus public sector banks have to explore the potential of the trust and have to transform
themselves into efficient universal banks. Social sector and private UB must launch attractive
and protective financial product, services and financial schemes which may be flaxy and tax
saving. They also motivate and properly guide society to invest their ideal money for better
growth and return in future. They must develop protective ring fence in which they have to
maintain enough capital and liquidity in order to support each business without any
discrimination. All the UBs have to be transparent and loyal to the customer and have to develop
confidence in society in order to attract investment in their banks. Regulators and Regulatory
bodies have to be effective and efficient in implementing the policies, rules and regulation time
to time in order to control the financial crimes.













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www.thehindu.com/2002/07/23/stories/2002072304301300.htm
http://www.managementor.com