Universal Banking

S.I.E.S.
College of Commerce and Economics
Universal Banking
Chapter 1
Universal Banking
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S.I.E.S. College of Commerce and Economics
Universal Banking
1.1
Introduction
The banking scenario in India has been changing at fast pace from being just the borrowers and lenders traditionally, the focus has shifted to more differentiated and customized product/service provider from regulation to liberalization in the year 1991, from planned economy to market.
The Indian banking has come a long way from being a sleepy business institution to a highly proactive and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending).
The competition heated up with the entry of private and foreign banks deregulation and globalization resulted in increased competition that refined the traditional way of doing business. They have realized the importance of a customer centric approach, brand building and IT enabled solutions. Banking today has transformed into a technology intensive and customer friendly model with a focus on convenience. The companies have redoubled their efforts to woo the customers and establish themselves firmly in the market. It is no longer an option for a company to provide good customer service, it is expected.
Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The sector is set to
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witness the emergence of financial supermarkets in the form of universal banks providing a suite of services from retail to corporate banking and industrial lending to investment banking. The financial services market has become a battle ground with the marketers with the latest and the most sophisticated weapons.
The Indian banking industry is currently in a transition phase. On the one hand, the public sector banks, which are the mainstay of the Indian banking system, are in the process of consolidating their position by capitalizing on the strength of their huge networks and customer bases. On the other, the private sector banks are venturing into a whole new game of mergers and acquisitions to expand their bases. The use of technology has placed Indian banks at par with their global peers. It has also changed the way banking is done in India. Anywhere banking and Anytime banking have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows.
The entry of banks into the realm of financial services was followed very soon after the introduction of liberalization in the economy. Since the early 1990s structural changes of profound magnitude have been witnessed in global banking systems. Large scale mergers, amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. Thus, emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking.
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1.2
Meaning
The financial and banking sector as it existed in the pre-reform days was highly regulated over-administered and subject to discretionary control and direction. In this sense, financial sector reforms were designed to infuse, in the words of the terms of reference of the Narsimham Committee, greater competitive vitality in the system.
In the financial system, the players can be broadly classified into the following groups: public sector banks, private sector banks, foreign banks, co operative banks, all- India financial institutions and non-banks. A common element in all Development Financing Institution (DFIs) is that they focus on investment rather than on conventional commercial banking operations, i.e., on deposit taking and short-term credit. On the other hand, the commercial banks continue to concentrate on their traditional business of accepting deposits and advancing loans. With encouragement and sometimes pressure, they have broaden their activities to include term credit and a broad range of non-banking finance, including leasing, venture capital, housing and household finance, mutual fund management, credit-card sponsorship, etc.
The term 'Universal Banking' in general refers to the combination of commercial banking and investment banking. The concept of universal banking is spreading fast among various types of banks.
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It is a multipurpose and multi-functional financial supermarket providing both 'Banking and Financial Services' through a single window. As per 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 Corporate Governance of firms that rely on the banks for funding or as insurance underwriters."
In a nutshell, a Universal Banking is a superstore for financial products, under one roof. Corporates can get loans and avail of other handy services, while individuals can bank and borrow. It includes not only services related to savings and loans but also investment. However in practice the term 'Universal Banking' refers to those banks that offer wide range of financial services beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Insurance, Credit Cards, Retail loans, Loans, etc. Housing Finance, Auto
However, Universal Banking does not mean that every institution conducts every type of business with every type of customer. In the spectrum of banking, specialized banking is on the one end and the Universal Banking on the other.
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1.3
Empirical Background of Universal Banking:
The entry of banks into the realm of financial services was followed very soon after Liberalization in the economy. Since the early 1990s, structural changes of profound magnitude came to be witnessed in global banking systems. Large scale mergers, amalgamations and acquisitions among the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. There thus emerged new financial conglomerates that could maximize Economies of Scale and Scope by building the production of financial services organization called Universal Banking.
By the mid 1990s, all the restrictions on Project Financing were removed and banks were allowed to undertake several activities in house. Reforms in the insurance sector in the late 1990s, and opening up of this field to private and foreign players also resulted in permitting banks to undertake sale of Insurance products. At present, only an 'arms length' relationship between a bank and insurance entity has been allowed by the regulatory authority, i.e.-IRDA (Insurance Regulatory & Development Authority).
The phenomenon of Universal Banking as a distinct concept, as different from Narrow Banking came to the forefront in the Indian context with II Narsimham Committee (1998) and later the Khan Committee (1998) reports recommending consolidation of the banking industry through mergers and integration of financial activities.
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1.4
Universal Banking in India
In India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sectoral needs and also providing longterm resources at concessional terms, while the commercial banks in general, by and large, confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry, trade and agriculture. Consequent to the liberalization and deregulation of financial sector, there has been blurring of distinction between the commercial banking and investment banking.
Reserve Bank of India constituted on December 8, 1997, a Working Group under the Chairmanship of Shri. S.H. Khan to bring about greater clarity in the respective roles of banks and financial institutions for greater harmonization of facilities and obligations. Also report of the Committee on Banking Sector Reforms or Narsimham Committee (NC) has major bearing on the issues considered by the Khan Working Group.
The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into a universal bank. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance, its proposed policy for universal banking, including a case-by case approach towards allowing domestic financial institutions to become universal banks.
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Now RBI has asked FIs, which are interested to convert itself into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions. FIs need to formulate a road map for the transition path and strategy for smooth conversion into a universal bank over a specified time frame. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period.
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1.5
The need behind the Advent of Universal Banking
Liberalization and the banking reforms have given new avenues to Development Finance Institutions (DFIs) to meet the broader market. They can avail the options to involve in deposit banking and short term lending as well. DFIs were set up with the objective of taking care of the investment needs of industries. They have build up expertise in Merchant Banking and Project Evaluation.
So, saddled with obligations to fund long gestation projects, the DFIs have been burdened with serious mismatches between their assets and liabilities of the balance sheet. In this context, the Narsimham Committee II had suggested DFIs should convert into banks or Non-Banking Finance Companies. Converting of these DFIs into Universal Banks will grant them ready access to cheap retail deposits and increase the coverage of the advances to include short term working capital loans to Corporates with greater operational flexibility. At that time DFIs were in the need to acquire a lot of mass in their volume of operations to solve the problem of total asset base and net worth. So, the emergence of Universal Banking was the solution for the problem of the banking sector.
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Chapter 2
Products And Services Offered By Universal Banks coupled with SWOT
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2.1
Products And Services Offered By Universal Banks
Broad Classification of Products in a Universal bank:
The different products in an universal bank can be broadly classified into: Retail Banking. Trade Finance. Treasury Operations. Retail Banking and Trade finance operations are conducted at the branch level while the wholesale banking operations, which cover treasury operations, are at the hand office or a designated branch.
Retail Banking
Retail banking is typical mass-market banking where individual customers use local branches of larger commercial banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so Retail banking aims to be the one-stop shop for as many financial services as possible on behalf of retail clients. Some retail banks have even made a push into investment services such as wealth management, brokerage accounts, private banking and retirement planning. While some of these ancillary services are outsourced to third parties (often for regulatory reasons), they often
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intertwine with core retail banking accounts like checking and savings to allow for easier transfers and maintenance.
Services provided by Retail Banks: Deposits Loans, Cash Credit and Overdraft Negotiating for Loans and advances Remittances Book-Keeping (maintaining all accounting records) Receiving all kinds of bonds valuable for safe keeping
Trade Finance
Trade finance is related to international trade. While a seller (the exporter) can request the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer's bank may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract. Other forms of trade finance can include trade credit insurance, export factoring, forfaiting and others. In many countries, trade finance is often supported by quasi-government entities known as export credit agencies that work with commercial banks and other financial institutions.
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In short, trade finance means money lent to exporters or importers.
It includes the following services: Issuing and confirming of letter of credit. Drawing, accepting, discounting, buying, selling, collecting of bills of exchange, promissory notes, drafts, bill of lading and other securities.
Treasury Operations
Treasury management (or treasury operations) includes management of an enterprise's holdings. It includes activities like trading in bonds, currencies, financial derivatives and also encompasses the associated financial risk management.All banks have departments devoted to treasury management, as do larger corporations Bank Treasuries may have the following departments: a) A Fixed Income or Money Market desk that is devoted to buying and selling interest bearing securities b) A Foreign exchange or "FX" desk that buys and sells currencies c) A Capital Markets or Equities desk that deals in shares listed on the stock market.
In addition the Treasury function may also have a Proprietary Trading desk that conducts trading activities for the bank's own account and capital, an Asset liability management or ALM desk that manages the risk of interest rate
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mismatch and liquidity; and a Transfer Pricing or Pooling function that prices liquidity for business lines (the liability and asset sales teams) within the bank. Banks may or may not disclose the prices they charge for Treasury Management products.
The operations include: Buying and selling of bullion. Foreign exchange Acquiring, holding, underwriting and dealing in shares, debentures, etc. Purchasing and selling of bonds and securities on behalf of constituents.
The banks can also act as an agent of the Government or local authority. They insure, guarantee, underwrite, participate in managing and carrying out issue of shares, debentures, etc. Apart from the above-mentioned functions of the bank, the bank provides a whole lot of other services like investment counseling for individuals, shortterm funds management and portfolio management for individuals and companies. It undertakes the inward and outward remittances with reference to foreign exchange and collection of varied types for the Government.
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2.2
Common Banking Products Available
Some of common available banking products which are in universal banks are explained below:
Credit Card
Credit Card is post paid or pay later card that draws from a credit line-money made available by the card issuer (bank) and gives one a grace period to pay. If the amount is not paid full by the end of the period, one is charged interest. A credit card is nothing but a very small card containing a means of identification, such as a signature and a small photo. It authorizes the holder to change goods or services to his account, on which he is billed. The bank receives the bills from the merchants and pays on behalf of the card holder. These bills are assembled in the bank and the amount is paid to the bank by the card holder totally or by installments. The bank charges the customer a small amount for these services. The card holder need not have to carry money/cash with him when he travels or goes for purchasing. Credit cards have found wide spread acceptance in the metros and big cities. Credit cards are joining popularity for online payments. The major players in the Credit Card market are the foreign banks and some big public sector banks like SBI and Bank of Baroda.
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Debit Cards
A debit card (also known as a bank card or check card) is a plastic card that provides an alternative payment method to cash when making purchases. Functionally, it can be called an electronic check, as the funds are withdrawn directly from either the bank account, or from the remaining balance on the card. In some cases, the cards are designed exclusively for use on the Internet, and so there is no physical card. In many countries the use of debit cards has become so widespread that their volume of use has overtaken or entirely replaced the check and, in some instances, cash transactions. Like credit cards, debit cards are used widely for telephone and Internet purchases and, unlike credit cards, the funds are transferred immediately from the bearer's bank account instead of having the bearer pay back the money at a later date. Debit cards may also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash and as a check guarantee card. Merchants may also offer cash back facilities to customers, where a customer can withdraw cash along with their purchase. Debit Card holder need not carry a bulky checkbook or large sums of cash when he/she goes at for shopping. This is a fast and easy way of payment one can get debit card facility as debit cards use ones own money at the time of sale, so they are often easier than credit cards to obtain.
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Automatic Teller Machine

An automated teller machine (ATM), also known as a automated banking machine (ABM) or Cash Machine and by several other names, is a computerized telecommunications device that provides the clients of a financial institution with access to financial transactions in a public space without the need for a cashier, human clerk or bank teller. On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smart card with a chip that contains a unique card number and some security information such as an expiration date or CVVC (CVV). Authentication is provided by the customer entering a personal identification number (PIN). Using an ATM, customers can access their bank accounts in order to make cash withdrawals, credit card cash advances, and check their account balances as well as purchase prepaid cell phone credit. If the currency being withdrawn from the ATM is different from that which the bank account is denominated in (e.g.: Withdrawing Japanese Yen from a bank account containing US Dollars), the money will be converted at a wholesale exchange rate. Thus, ATMs often provide the best possible exchange rate for foreign travelers and are heavily used for this purpose as well. ATMs are known by various other names including automatic banking machine (or automated banking machine particularly in the United States) (ABM), automated transaction machine, cash point (particularly in the United Kingdom), money machine, bank machine, cash machine, hole-in-the-wall,
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autoteller (after the Bank of Scotland's usage), cashline machine (after the Royal Bank of Scotland's usage), MAC Machine (in the Philadelphia area), Bankomat (in various countries particularly in Europe and including Russia), Multibanco (after a registered trade mark, in Portugal), Minibank in Norway, Geld Automaat in Belgium and the Netherlands, and All Time Money in India.
Advantages of ATMs: To the Customers

ATMs provide 24 hrs, 7 days and 365 days a year service. Service is quick and efficient Privacy in transaction Wider flexibility in place and time of withdrawals. The transaction is completely secure you need to key in Personal Identification Number (Unique number for every customer).
To Banks
Alternative to extend banking hours. Crowding at bank counters considerably reduced. Alternative to new branches and to reduce operating expenses. Relieves bank employees to focus an more analytical and innovative work. Increased market penetration.
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ATMs can be installed anywhere like Airports, Railway Stations, Petrol Pumps, Big Business arcades, markets, etc. Hence, it gives easy access to the customers, for obtaining cash. The ATM services provided first by the foreign banks like Citibank, Grind lays bank and now by many private and public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc. The ICICI has launched ATM Services to its customers in all the Metropolitan Cities in India. By the end of 1990 Indian Private Banks and public sector banks have come up with their own ATM Network in the form of SWADHAN. Over the past year upto 44 banks in Mumbai, Vashi and Thane, have became a part of SWADHAN a system of shared payments networks, introduced by the Indian Bank Association (IBA).
E-Cheques
E-cheques are a mode of electronic payments. E-cheques work the same way as paper cheques and are a legally binding promise to pay. This technology was developed couple of years ago by a consortium of Silicon Valley IT researchers and merchant bankers and since then has been promoted by many of the financial bodies. E-cheques work the same way as paper cheques and are a legally binding promise to pay. The payment system uses digitally signed XML documents that provide mechanism to authenticate parties to a transaction. Echeques are defined using FSML (financial services markup language) which allows for addition and deletion of document blocks, signing, co-signing, endorsing, etc.
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Signatures are accompanied by bank-issued certificates which tie the signer's key to a bank account. It seems that consumers would gain from having E-cheques available to make payments for online purchases. The online merchants on the other hand could receive payments instantly and since the customers bank will be involved in the transaction. It would be impossible for E-cheques to bounce. Banks can do paperless, efficient transactions. A typical electronic cheque transaction takes place in the following manner: The customer accesses the merchant server and the merchant server presents its goods to the customer. The consumer selects the goods and purchases them by sending an echeque to the merchant. The merchant validates the e-cheque with its bank for payment authorisation. The merchant electronically forwards the e-cheque to its bank. The merchants bank forwards the e-cheque to the clearing house for cashing. The clearing house jointly works with the consumers bank clears the cheque and transfers the money to the merchants banks. The merchants bank updates the merchants account. The consumers bank updates the consumers account with the withdrawal information. The e-chequing is a great boon to big corporate as well as small retailers. Most major banks accept e-cheques. Thus this system offers secure means of collecting payments, transferring value and managing cash flows.
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Electronic Funds Transfer (EFT)
Many modern banks have computerised their cheque handling process with computer networks and other electronic equipments. These banks are dispensing with the use of paper cheques. The system called electronic fund transfer (EFT) automatically transfers money from one account to another. This system facilitates speedier transfer of funds electronically from any branch to any other branch. In this system the sender and the receiver of funds may be located in different cities and may even bank with different banks. Funds transfer within the same city is also permitted. The scheme has been in operation since February 7, 1996, in India. The other important type of facility in the EFT system is automated clearing houses. These are the computer centers that handle the bills meant for deposits and the bills meant for payment. In big companies pay is not disbursed by issued cheques or issuing cash. The payment office directs the computer to credit an employees account with the persons pay.
Telebanking
Telebanking refers to banking on phone services a customer can access information about his/her account through a telephone call and by giving the coded Personal Identification Number (PIN) to the bank. Telebanking is extensively user friendly and effective in nature.
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To get a particular work done through the bank, the users may leave his instructions in the form of message with bank. Facility to stop payment on request. One can easily know about the cheque status. Information on the current interest rates. Information with regard to foreign exchange rates. Request for a DD or pay order. D-Mat Account related services. And other similar services.
Mobile Banking
A new revolution in the realm of e-banking is the emergence of mobile banking. On-line banking is now moving to the mobile world, giving everybody with a mobile phone access to real-time banking services, regardless of their location. But there is much more to mobile banking from just on-line banking. It provides a new way to pick up information and interact with the banks to carry out the relevant banking business. The potential of mobile banking is limitless and is expected to be a big success. Booking and paying for travel and even tickets is also expected to be a growth area. According to this system, customer can access account details on mobile using the Short Messaging System (SMS) technology where select data is pushed to the mobile device. The wireless application protocol (WAP) technology, which will allow user to surf the net on their mobiles to access
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anything and everything. This is a very flexible way of transacting banking business. Already ICICI and HDFC banks have tied up cellular service provides such as Airtel, Orange, Sky Cell, etc. in Delhi and Mumbai to offer these mobile banking services to their customers.
Internet Banking
Internet banking involves use of internet for delivery of banking products and services. With internet banking is now no longer confirmed to the branches where one has to approach the branch in person, to withdraw cash or deposits a cheque or requests a statement of accounts. In internet banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time. The Internet Banking now is more of a normal rather than an exception due to the fact that it is the cheapest way of providing banking services. As indicated by McKinsey Quarterly research, presently traditional banking costs the banks, more than a dollar per person, ATM banking costs 27 cents and internet banking costs below 4 cents approximately. ICICI bank was the first one to offer Internet Banking in India.
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Benefits of Internet Banking:

Reduce the transaction costs of offering several banking services and diminishes the need for longer numbers of expensive brick and mortar branches and staff. Increase convenience for customers, since they can conduct many banking transaction 24 hours a day. Increase customer loyalty. Improve customer access. Attract new customers. Easy online application for all accounts, including personal loans and mortgages
Financial Transaction on the Internet:
Electronic Cash: Companies are developing electronic replicas of all existing payment system: cash, cheque, credit cards and coins.
Automatic Payments: Utility companies, loans payments, and other businesses use on automatic payment system with bills paid through direct withdrawal from a bank account.
Direct Deposits: Earnings (or Government payments) automatically deposited into bank accounts, saving time, effort and money.
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Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls, laundry service, library fees and school lunches.
Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants for payment of goods and services. This system has made functioning of the stock Market very smooth and efficient.
Cyber Banking: It refers to banking through online services. Banks with web site Cyber branches allowed customers to check balances, pay bills, transfer funds, and apply for loans on the Internet.
Demat:
Demat is short for de-materialisation of shares. In short, Demat is a process where at the customers request the physical stock is converted into electronic entries in the depository system. In January 1998 SEBI (Securities and Exchange Board of India) initiated DEMAT ACCOUNTANCY System to regulate and to improve stock investing. As on date, to trade on shares it has become compulsory to have a share demat account and all trades take place through demat. One needs to open a Demat Account with any of the branches of the bank. After opening an account with any bank, by filling the demat request form one can handover the securities. The rest will be taken care by the bank and the
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customer will receive credit of shares as soon as it is confirmed by the Company/Register and Transfer Agent. There is no physical movement of share certification any more. Any buying or selling of shares is done via electronic transfers. 1. If the investor wants to sell his shares, he has to place an order with his broker and give a Delivery Instruction to his DP (Depository Participant). The DP will debit hi s account with the number of shares sold by him. 2. If one wants to buy shares, he has to inform his broker about his Depository Account Number so that the shares bought by him are credited in to his account. 3. Payment for the electronic shares bought or sold is to be made in the same way as in the case of physical securities.
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2.3
UNIVERSAL BANKING SERVICES
Banking covers so many services that it is difficult to define it. However, these basic services have always been recognized as the hallmark of the genuine banker. These are: The receipt of the customers deposits The collection of his cheques drawn on other banks The payment of the customers cheques drawn on himself
There are other various types of banking services like:

Advances Overdraft, Cash Credit, etc. Deposits Saving Account, Current Account, etc. Financial Services Bill discounting etc. Foreign Services Providing foreign currency, travelers cheques, etc. Money Transmission Funds transfer etc. Savings Fixed deposits, etc. Services of place or time ATM Services. Status Debit Cards, Credit Cards, etc.
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2.4
Universal Banking coupled with SWOT
The solution of Universal Banking was having many factors to deal with which further categorized under Strengths, Weaknesses, Opportunities and Threats:
Strengths:
Economies Of Scale The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. Various Reserve Banks Committees and reports in favor of Universal Banking, is that it enables banks to exploit economies of scale and scope. It means a bank can reduce average costs and thereby improve spreads if it expands its scale of operations and diversifying activities.
Profitable Diversions By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types. So, it entails less cost in performing all the functions by one entity instead of separate bodies.
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Resource Utilization A bank possesses the information on the risk characteristics of the clients, which it can use to pursue other activities with the same client. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc are useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in Research. Easy marketing on the foundation a of Brand name A bank has an existing network of branches, which can act as shops for selling products like Insurance, Mutual Fund without much efforts on marketing, as the branch will act here as a parent company or source. In this way a bank can reach the remotest client without having to take recourse to an agent. One stops shopping The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as customers. Investor friendly activities Another manifestation of Universal Banking is bank holding stakes in a firm. A bank's equity holding in a borrower firm, acts as a signal for other investors on to the health of the firm, since the lending bank is in a better position to monitor the firm's activities.
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Easy handling of business cycles Due to various shifts in business cycles, the demand for products also varies at different points of time. It is generally held that universal banks could easily handle such situations by shifting the resources within the organization as compared to specialized banks. Specialized firms are also subject to substantial risks of failure. Because their operations are not well diversified. By offering a broader set of financial products than what a specialized bank provides, it has been argued that a universal bank is able to establish long-term relationship with the customers and provide them with a package of financial services through a single window.
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Weaknesses:
Grey area of Universal Bank The path of Universal Banking for DFIs is strewn with obstacles. The biggest one is overcoming the differences in regulatory requirements for a bank and DFI. Unlike banks, DFIs are not required to keep a portion of their deposits as cash reserves.
No expertise in long term lending In the case of traditional project finance an area where DFIs tread carefully, becoming a bank may not make a big difference. Project finance and Infrastructure Finance are generally long gestation projects and would require DFIs to borrow long term. Therefore, the transformation into a bank may not be of great assistance in lending long-term.
NPA problem remained intact The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA). For the DFIs and Universal Banking or installation of cutting edge technology in operations are unlikely to improve the situation concerning NPAs. Most of the NPAs came out of loans to commodity sectors, such as steel, chemicals, textiles, etc. the improper use of DFI funds by project promoters, a sharp change in operating environment and poor appraisals by DFIs combined to destroy the viability of some projects. So, instead of
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improving the situation Universal Banking may worsen the situation, due to the expansion in activities banks will fail to make thorough study of the actual need of the party concerned, the prospect of the business, in which it is engaged, its track record, the quality of the management, etc. ICICI suffered the least in this section, but the IDBI has got worst hit of NPAs, considering the negative developments at Dabhol Power Company (DPC).
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Threats:
Big Empires Universal Banking is an outcome of the mergers and acquisitions in the banking sector. The Finance Ministry is also empathetic towards it. But there will be big empires which may put the economy in a problem. Universal Banks will be the largest banks, by their asset base, income level and profitability there is a danger of 'Price Distortion'. It might take place by manipulating interests of the bank for the self interest motive instead of social interest. There is a threat to the overall quality of the products of the bank, because of the possibility of turning all the strengths of the Universal Banking into weaknesses. (e.g. - the strength of economies of scale may turn into the degradation of qualities of bank products, due to over expansion. If the banks are not prudent enough, deposit rates could shoot up and thus affect profits. To increase profits quickly banks may go in for riskier business, which could lead to a full in asset quality. Disintermediation and securitization could further affect the business of banks .
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Opportunities:
To increase efficiency and productivity Liberalization offers opportunities to banks. Now, the focus will be on profits rather than on the size of balance sheet. Fee based incomes will be more attractive than mobilizing deposits, which lead to lower cost funds. To face the increased competition, banks will need to improve their efficiency and productivity, which will lead to new products and better services. To get more exposure in the global market In terms of total asset base and net worth the Indian banks have a very long road to travel when compared to top 10 banks in the world. (SBI is the only Indian bank to appear in the top 100 banks list of 'Fortune 500' based on sales, profits, assets and market value. It also ranks II in the list of Forbes 2000 among all Indian companies) as the asset base sans capital of most of the top 10 banks in the world are much more than the asset base and capital of the entire Indian banking sector. In order to enter at least the top 100 segment in the world, the Indian banks need to acquire a lot of mass in their volume of operations. Pure routine banking operations alone cannot take the Indian banks into the league of the Top 100 banks in the world. Here is the real need of universal banking, as the wide range of financial services in addition to the Commercial banking functions like Mutual Funds, Merchant banking, Factoring, Insurance, credit cards, retail, personal loans, etc. will help in enhancing overall profitability.
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To eradicate the 'Financial Apartheid'
A recent study on the informal sector conducted by Scientific Research Association for Economics (SRA), a Chennai based association, has found out that, 'Though having a large number of branch network in rural areas and urban areas, the lowest strata of the society is still out of the purview of banking services. Because the small businesses in the city, 34% of that goes to money lenders for funds. Another 6.5% goes to pawn brokers, etc. The respondents were businesses engaged in activities such as fruits and vegetables vendors, laundry services, provision stores, petty shops and tea stalls. 97% of them do not depend the banking system for funds. Not because they do not want credit from banking sources, but because banks do not want to lend these entrepreneurs. It is a situation of Financial Apartheid in the informal sector. It means with the help of retail and personal banking services Universal Banking can reach this stratum easily.
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Chapter 3 Committee Reports, Guidelines & its Impact
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3.1
Khan Committee On Universal Banking
The khan committee on harmonizing the role and operations of development financial institutions and banks submitted its report on April 24, 1998 with following recommendations: Give banking license to DFIs Merge banks with banks, DFIs Bring down CRR progressively Phase out SLR Redefine priority sector Set up a super regulator to coordinate regulators activities Develop risk-based supervisory framework Usher in legal reforms in debt recovery State level FIs be allowed to go public and come under RBI DFIs be permitted to have wholly-owned banking subsidiaries Remove cap on FIs resources mobilization Grant authorized dealers license to DFIs Set up a standing committee to coordinate lending policies
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Recommendations: About Universal Banking Universal banking refers to elimination of the distinction between the development financial institutions and the banks and market segmentation that presently exists between them.
About Harmonization Of Role Of Banks And DFIs Harmonization means the introduction of universal banking in a limited sense, wherein the DFIs could become banks and intermediate in the short-term end of the financial market (say finance for working capital) and commercial banks could enter the long-term end of the financial market (say project financing). In other words, the harmonization allows the DFIs and banks to move freely to the other end than where they are presently placed.
About The Main Areas Of Operations Of DFIs And Banks Presently And How: Universalisation Will Change That Role In Future. DFIs are specialist institutions catering to different sectors, appraising projects from technical and financial parameters and finance long-term investment requirements. This specialization has given edge to DFIs in terms of project appraisal. On the other hand, the banks meet the short term investment and production requirements and they have developed expertise in providing working capital finance to industry, exports, imports, small industry, agriculture
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etc. They can take as intermediates in a big way at the other end of their markets where they are less dominant presently. Some of them may even diversify into insurance and other related areas.
About Requirement Of Cost Considerations In Universalisation Cost of funds differentiates the DFIs from banks, as DFIs incur higher costs for mobilizing long-term finance. Banks do not normally mobilize substantial deposit resources with maturities in excess of 5 years, which limits their capacity to extend long-term loans. This has resulted in participation type of relationship in financing by banks and DFIs.
About The Areas Of Conflict arising Between Banks And DFIs There are conflicts relating to securities for the loans sanctioned by the banks and DFIs. While the DFIs have first charge over block assets, the banks have first charge on current assets, which place both the banks and DFIs in different positions. Another area of conflict is extension of refinance by DFIs to banks to supplement banks long-term resources. But due to higher cost of their funds, the DFIs find it a losing proposition.
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About The Committee Which Recommended Universal Banking & What It Suggested The S H Khan Committee suggested the concept of Universal Banking. It also suggested to give banking license to DFIs, merging banks with banks or DFIs, bring down CRR progressively, phase out SLR, redefine priority sector, set up a super regulator to coordinate regulators activities, develop risk-based supervisory framework, usher in legal reforms in debt recovery, allow State level FIs to go public and come under RBI, permit DFIs to have wholly-owned banking subsidiaries, remove cap on FIs resources mobilization, grant authorized dealers license to DFIs, set up a standing committee to coordinate lending policies etc.
About The Likely Gains From Universalisation The universalisation is expected to result in expansion of banks and diversification into new financial and Para-banking services. The business focus of the banks would emerge on profit lines. This may at the same time result in reluctance on their part to enter the smaller end of retail banking particularly, the small borrowers in rural areas, who may find it difficult to access the banking services, since they do not contribute substantially to Banks Business Volumes or Profits.
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About The Apprehensions Of Universalisation The financial services may not become the privilege of elitist. If the reforms with a human face are what we want, the universal banking has to make adjustments and ensure that financial services are available to all at affordable costs.
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3.2
Need Of Universal Banking In India
1. The phenomenon of universal bankingas different from narrow banking is suddenly in the news. With the second Narsimham Committee (1998) and the Khan Committee (1998) reports recommending consolidation of the banking industry through mergers and integration of financial activities, the stage seems to be set for a debate on the entire issue.
2. A universal bank is a one-stop supplier for all financial products and activities, like deposits, short-term and long-term loans, insurance, investment etc.
3. The benefits to banks from universal banking are the standard argument given everywhere also by the various Reserve Bank committees and reportsin favour of universal banking is that it enables banks to exploit economies of scale and scope.
4. So that a bank can reduce average costs and thereby improves spreads if it expands its scale of operations and diversifies its activities.
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5. The bank can diversify its existing expertise in one type of financial service in providing the other types. So, it entails less cost in performing all the functions by one entity instead of separate specialized bodies.
6. A bank has an existing network of branches, which can act as shops for selling products like insurance. This way a big bank can reach the remotest client without having to take recourse to any agent.
7. Many financial services are inter-linked activities, e.g. insurance and lending. A bank can use its instruments in one activity to exploit the other, e.g., in the case of project lending to the same firm, which has purchased insurance from banking
8. The idea of one-stop-shopping saves a lot of transaction costs and increases the speed of economic activity. Another manifestation of universal banking is a bank holding stakes in a firm.
9. In India, too, a lot of opportunities are there to be exploited. Banks, especially the financial institutions, are aware of it. And most of the groups have plans to diversify in a big way.
10.
At present, only an arms-length relationship between a bank and
an insurance entity has been allowed by the regulatory authority, i.e. the
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Insurance Regulatory and Development Authority (IRDA). This means that commercial banks can enter insurance business either by acting as agents or by setting up joint ventures with insurance companies.
11.
Development financial institutions (DFIs) can turn themselves into
banks, but have to adhere to the statutory liquidity ratio and cash reserve requirements meant for banks, which they are lobbying to avoid.
All these can be seen as steps towards an ultimate culmination of financial intermediation in India into universal banking.
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3.3
Approach To Universal Banking
The Narsimham Committee II suggested that Development Financial Institutions (DFIs) should convert ultimately into either commercial banks or non-bank finance companies. The Khan Working Group held the view that DFIS should be allowed to become banks at the earliest. The RBI released a 'Discussion Paper' (DP) in January 1999 for wider public debate. The feedback on the discussion paper indicated that while the universal banking is desirable from the point of view of efficiency of resource use, there is need for caution in moving towards such a system by banks and DFIs.
The principle of "Universal Banking" is a desirable goal and some progress has already been made by permitting banks to diversify into investments and long-term financing and the DFIs to lend for working capital, etc. However, banks have certain special characteristics and as such any dilution of RBI's prudential and supervisory norms for conduct of banking business would be inadvisable.
Though the DFIs would continue to have a special role in the Indian financial System, until the debt market demonstrates substantial improvements in terms of liquidity and depth, any DFI, which wishes to do so, should have the option to transform into bank (which it can exercise), provided the prudential
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norms as applicable to banks are fully satisfied. To this end, a DFI would need to prepare a transition path in order to fully comply with the regulatory requirement of a bank. The DFI concerned may consult RBI for such transition arrangements. Reserve Bank will consider such requests on a case-by-case basis. Financing requirements, which is necessary. In due course, and in the light of evolution of the financial system, Narsimham Committee's
recommendation that, ultimately there should be only banks and Restructured NBFCs can be operationalised.
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3.4
RBI Guidelines for Existing Banks/FIs for Conversion into Universal Banks:
Salient operational and regulatory issues to be addressed by the FIs For the conversion into Universal bank are: -
Reserve Requirements:Compliance with the cash reserve ratio and statutory liquidity ratio requirements (under Section 42 of RBI Act, 1934, and Section 24 of the Banking Regulation Act, 1949, respectively) would be mandatory for an FI after its conversion into a universal bank
Permissible activities Any activity of an FI currently undertaken but not permissible for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested after its conversion into a universal bank.
Disposal of non-banking assets Any immovable property, howsoever acquired by an FI, would, after its conversion into a universal bank, be required to be disposed of within the maximum period of 7 years from the date of acquisition, in terms of Section 9 of the B. R. Act.
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Composition of the Board Changing the composition of the Board of Directors might become necessary for some of the FIs after their conversion into a universal bank, to ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires at least 51% of the total number of directors to have special knowledge and experience Prohibition on floating charge of assets The floating charge, if created by an FI, over its assets, would require, after its conversion into a universal bank, ratification by the Reserve Bank of India under Section 14(A) of the B. R. Act, since a banking company is not allowed to create a floating charge on the undertaking or any property of the company unless duly certified by RBI as required under the Section. Nature of subsidiaries If any of the existing subsidiaries of an FI is engaged in an activity not permitted under Section 6(1) of the B R Act, then on conversion of the FI into a universal bank, delinking of such subsidiary / activity from the operations of the universal bank would become necessary since Section 19 of the Act permits a bank to have subsidiaries only for one or more of the activities permitted under Section 6(1) of B. R. Act.
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Restriction on investments An FI with equity investment in companies in excess of 30 per cent of the paid up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less, on its conversion into a universal bank, would need to divest such excess holdings to secure compliance with the provisions of Section 19(2) of the B. R. Act, which prohibits a bank from holding shares in a company in excess of these limits. Connected lending Section 20 of the B. R. Act prohibits grant of loans and advances by a bank on security of its own shares or grant of loans or advances on behalf of any of its directors or to any firm in which its director/manager or employee or guarantor is interested. The compliance with these provisions would be mandatory after conversion of an FI to a universal bank. Licensing An FI converting into a universal bank would be required to obtain a banking license from RBI under Section 22 of the B. R. Act, for carrying on banking business in India, after complying with the applicable conditions.
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Branch network An FI, after its conversion into a bank, would also be required to comply with extant branch licensing policy of RBI under which the new banks are required to allot at least 25 per cent of their total number of branches in semi-urban and rural areas. Assets in India An FI after its conversion into a universal bank, will be required to ensure that at the close of business on the last Friday of every quarter, its total assets held in India are not less than 75 per cent of its total demand and time liabilities in India, as required of a bank under Section 25 of the B R Act. Format of annual reports After converting into a universal bank, an FI will be required to publish its annual balance sheet and profit and loss account in the in the forms set out in the Third Schedule to the B R Act, as prescribed for a banking company under Section 29 and Section 30 of the B. R. Act. Managerial remuneration of the Chief Executive Officers On conversion into a universal bank, the appointment and remuneration of the existing Chief Executive Officers may have to be reviewed with the approval of RBI in terms of the provisions of Section 35 B of the B. R. Act. The Section stipulates fixation of remuneration of
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the Chairman and Managing Director of a bank by Reserve Bank of India taking into account the profitability, net NPAs and other financial parameters. Under the Section, prior approval of RBI would also be required for appointment of Chairman and Managing Director. Deposit insurance An FI, on conversion into a universal bank, would also be required to comply with the requirement of compulsory deposit insurance from DICGC up to a maximum of Rs.1 lakh per account, as applicable to the banks. Authorized Dealer's License Some of the FIs at present hold restricted AD license from RBI, Exchange Control Department to enable them to undertake transactions necessary for or incidental to their prescribed functions. On conversion into a universal bank, the new bank would normally be eligible for fullfledged authorized dealer license and would also attract the full rigor of the Exchange Control Regulations applicable to the banks at present, including prohibition on raising resources through external commercial borrowings. Priority sector lending On conversion of an FI to a universal bank, the obligation for lending to "priority sector" up to a prescribed percentage of their 'net bank credit' would also become applicable to it .
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Prudential norms After conversion of an FI in to a bank, the extant prudential norms of RBI for the all-India financial institutions would no longer be applicable but the norms as applicable to banks would be attracted and will need to be fully complied with.
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3.5
Impact Of Universal Banking
Since the early 1990s, banking systems worldwide have been going through a rapid transformation. Mergers, amalgamations and acquisitions have been undertaken on a large scale in order to gain size and to focus more sharply on competitive strengths. This consolidation has produced financial
conglomerates that are expected to maximize economies of scale and scope by bundling the production of financial services. The general trend has been towards downstream universal banking where banks have undertaken traditionally non-banking activities such as investment banking, insurance, mortgage financing, securitization, and particularly, insurance. Upstream linkages, where non-banks undertake banking business, are also on the increase.
The global experience can be segregated into broadly three models. There is the Swedish or Hong Kong type model in which the banking corporate engages in in-house activities associated with banking. In Germany and the UK, certain types of activities are required to be carried out by separate subsidiaries. In the US type model, there is a holding company structure and separately capitalized subsidiaries.
In India, the first impulses for a more diversified financial intermediation were witnessed in the 1980s and 1990s when banks were allowed to undertake
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leasing, investment banking, mutual funds, factoring, hire-purchase activities through separate subsidiaries. By the mid-1990s, all restrictions on project financing were removed and banks were allowed to undertake several activities in-house. In the recent period, the focus is on Development Financial Institutions (DFIs), which have been allowed to setup banking subsidiaries and to enter the insurance business along with banks. DFIs were also allowed to undertake working capital financing and to raise short-term funds within limits.
It was the Narsimham Committee II Report (1998) which suggested that the DFIs should convert themselves into banks or non-bank financial companies, and this conversion was endorsed by the Khan Working Group (1998). The Reserve Banks Discussion Paper (1999) and the feedback thereon indicated the desirability of universal banking from the point of view of efficiency of resource use, but it also emphasized the need to take into account factors such as the status of reforms, the state of preparedness of the institutions, and a viable transition path while moving in the desired direction.
Accordingly, the mid-term review of monetary and credit policy, October 1999 and the annual policy statements of April 2000 and April 2001 enunciated the broad approach to universal banking and the Reserve Banks circular of April 2001 set out the operational and regulatory aspects of conversion of DFIs into universal banks. The need to proceed with planning and foresight is necessary for several reasons. The move towards universal banking would not provide a panacea for the endemic weaknesses of a DFI or its liquidity and
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solvency
problems
and/or
operational
difficulties
arising
from
undercapitalization, non-performing assets, and asset liability mismatches, etc. The overriding consideration should be the objectives and strategic interests of the financial institution concerned in the context of meeting the varied needs of customers, subject to normal prudential norms applicable to banks. From the point of view of the regulatory framework, the movement towards universal banking should entrench stability of the financial system, preserve the safety of public deposits, improve efficiency in financial intermediation, ensure healthy competition, and impart transparent and equitable regulation.
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3.6
Universal Banking Pros And Cons The solution of Universal Banking was having many factors to deal with, which can be further analyzed by the pros and cons.
Advantages of Universal Banking
Economies of Scale: The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. Many Committees and reports by Reserve Bank of India are in favour of Universal banking as it enables banks to exploit economies of scale and scope.
Profitable Diversions: By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types. So, it entails less cost in performing all the functions by one entity instead of separate bodies.
Resource Utilization: A bank possesses the information on the risk characteristics of the clients, which can be used to pursue other activities with the same clients. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non
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diversifiable risk analysis, etc, is useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in the researching
Easy Marketing on the Foundation of a Brand Name: A bank's existing branches can act as shops of selling for selling financial products like Insurance, Mutual Funds without spending much efforts on marketing, as the branch will act here as a parent company or source. In this way, a bank can reach the client even in the remotest area without having to take resource to an agent.
One-stop shopping: The idea of 'one-stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as its customers.
Investor Friendly Activities: Another manifestation of Universal Banking is bank holding stakes in a form : a bank's equity holding in a borrower firm, acts as a signal for other investor on to the health of the firm since the lending bank is in a better position to monitor the firm's activities.
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Disadvantages of Universal Banking
Grey Area of Universal Bank. The path of universal banking for DFIs is strewn with obstacles. The biggest one is overcoming the differences in regulatory requirement for a bank and DFI. Unlike banks, DFIs are not required to keep a portion of their deposits as cash reserves.
No Expertise in Long term lending. In the case of traditional project finance, an area where DFIs tread carefully, becoming a bank may not make a big difference to a DFI. Project finance and Infrastructure finance are generally long- gestation projects and would require DFIs to borrow longterm. Therefore, the transformation into a bank may not be of great assistance in lending long-term.
NPA Problem Remained Intact. The most serious problem that the DFIs have had to encounter is bad loans or Non-Performing Assets (NPAs). For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs.
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Chapter 4
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4.1
Introduction To ICICI Bank
The Industrial Credit and Investment Corporation of India limited (ICICI) was formed in 1955 at the initiative of the World Bank, the government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. Until the late 1980s, ICICI primarily focused its activities on project finance, providing long-term funds to a variety of industrial projects. ICICI typically obtained funds for these activities through a variety of government-sponsored and government-assisted programs designed to facilitate industrial development in India. Today ICICI is one of the largest financial institutions in India. It provides a wide range of products and services aimed at fulfilling the banking and financial needs of India's corporate and retail sectors. ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety
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of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI group's universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entity's access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transaction-banking services. The merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICI's strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its whollyowned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmadabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity.
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4.2
History Of ICICI Bank
1955: The Industrial Credit and Investment Corporation of India Limited (ICICI) incorporated at the initiative of the World Bank, the Government of India and representatives of Indian industry, with the objective of creating a development financial institution for providing medium-term and long-term project financing to Indian businesses. Mr. A. Ramaswami Mudaliar elected as the first Chairman of ICICI Limited ICICI emerges as the major source of foreign currency loans to Indian industry. Besides funding from the World Bank and other multi-lateral agencies, ICICI also among the first Indian companies to raise funds from International markets.
1956: ICICI declared its first Dividend at 3.5%.
1958: Mr. G. L. Mehta was appointed the 2nd Chairman of ICICI Ltd.
1960: ICICI building at 163, Backbay Reclamation was inaugurated.
1961: The first West German loan of DM 5 million from Kredianstalt was obtained by ICICI. 1967: ICICI made its first debenture issue for Rs.6 crores, which was oversubscribed.
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1969: First two regional offices in Calcutta and Madras were opened.
1972: Second entity in India to set-up merchant banking services. Mr. H. T. Parekh appointed as the third Chairman of ICICI.
1977: ICICI sponsors the formation of Housing Development Finance Corporation. Managed its first equity public issue.
1978: Mr. James Raj appointed as the fourth Chairman of ICICI.
1979: Mr. Siddharth Mehta appointed as the fifth Chairman of ICICI.
1982: Becomes the first ever Indian borrower to raise European Currency Units. ICICI commences leasing business.
1984: Mr. S. Nadkarni appointed as the sixth Chairman of ICICI.
1985: Mr. N. Vaghul appointed as the seventh Chairman and Managing Director of ICICI.
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1986: ICICI first Indian Institution to receive ADB Loans. First public issue by an Indian entity in the Swiss Capital Markets. ICICI along with UTI sets up
Credit Rating Information Services of India Limited, (CRISIL) India's first professional credit rating agency. ICICI promotes Shipping Credit and
Investment Company of India Limited. (SCIC) .The Corporation made a public issue of Swiss Franc 75 million in Switzerland, the first public issue by any Indian equity in the Swiss Capital Market.
1987: ICICI signed a loan agreement for Sterling Pound 10 million with Commonwealth Development Corporation (CDC), the first loan by CDC for financing projects in India.
1988: ICICI promotes TDICI - India's first venture capital company.
1993: ICICI sets-up ICICI Securities and Finance Company Limited in joint venture with J. P. Morgan. ICICI sets up ICICI Asset Management Company.
1994: ICICI sets up ICICI Bank.
1996: ICICI becomes the first company in the Indian financial sector to rise GDR. ICICI announces merger with SCICI. Mr. K. V. Kamath appointed the Managing Director and CEO of ICICI Ltd.
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1997: ICICI was the first intermediary to move away from single prime rate to three-tier prime rates structure and introduced yield-curve based pricing. The name "The Industrial Credit and Investment Corporation of India Limited "was changed to "ICICI Limited". ICICI announces takeover of ITC Classic Finance.
1998: Introduced the new logo symbolizing a common corporate identity for the ICICI Group. ICICI announces takeover of Anagram Finance.
1999: ICICI launches retail finance - car loans, house loans and loans for consumer Durables. ICICI becomes the first Indian Company to list on the NYSE through an Issue of American Depositary Shares.
2000: ICICI Bank becomes the first commercial bank from India to list its stock on NYSE. ICICI Bank announces merger with Bank of Madura.
2001: The Boards of ICICI Ltd and ICICI Bank approved the merger of ICICI with ICICI Bank.
2002: Moodys assign higher than sovereign rating to ICICI. Merger of ICICI Limited, ICICI Capital Services Ltd and ICICI Personal Financial Services Limited with ICICI Bank.
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4.3
SWOT Analysis Of ICICI Bank
STRENGTHS: ICICI's distribution network is a major strength of the company. It has physical presence across 42 cities. It also has a strong network of marketing agents, ATMs and call centers. ICICI offers a wide range of products and services to its corporate and retail customers. This has increased its market share and enabled it to move a step ahead to achieve its vision of being a Universal Bank. WEAKNESSES: The company has a large amount of non-performing loans. OPPORTUNITIES: The signs of Indian economy reviving have created a lot of opportunities for the company. The industrial production has gone up by 8% and this is expected to favor the company. The revival in the economy will reduce the NPAs and could result in growth of credit. THREATS: Increased competition from foreign banks which have begun to foray into financial services segment will pose a threat to the company's market share and hence its bottom line.
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4.4
Merger Of ICICI & ICICI Bank
The merger is a culmination of a dream, which began five years ago. This process was initiated in 1996. The time when SCICI merged with ICICI, in 199798 ICICI acquired ITC classic and Anagram finance by way of acquisition, in 2000, ICICI bank gobbled up Bank of Madura. Reverse merger of ICICIs MD & CEO K.V. Kamath started articulating on it in 1996. At first, it seemed impossibility latter, it looked imperative. On 25the of October Indias first true-blue universal bank was born, as ICICI reverse merged into its sibling ICICI Bank to create a Rs. 95,000 crores asset base monolith, only second after SBI that has the asset base of 3,16,000 crores. HDFC Bank is left at third place with asset size of Rs. 19000 crores. Earlier the reverse merger looked like a bailout strategy for Non Performing Assets (NPA) ridden ICICI, but later the merger seemed justified because of possibility of numerous benefits through size and diverse portfolio of products of two entities. Swap ration for merger is decided to be two shares of ICICI for one share of ICICI Bank. Merged entity became fully operational from 31 March, 2002. ICICI requires this five-month to meet all regulatory requirements. The other interesting aspect of reverse merger is its methodology. ICICI Bank has adopted the purchase method of accounting principles (GAAP) for the merger, unique in India. ICICIs assets and liabilities will be fair valued for the purpose of incorporation in the accounts of ICICI Bank on the appointed date. This accounting practice is opportunity for ICICI to bring down its level of NPA.
st
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The new entity will have the capital adequacy ratio of 11.25 per cent with Tier I capital contributing 7.5 per cent and Tier II 3.75 per cent. Merged entity will have following features: a) Strong retail franchise will be able to access low- cost savings bank and current account. b) Funding cost will be reduced. c) Leverage on its large capital base, products suite, extensive corporate and retail customer relationship, technology enabled distribution system & vast talent pool. d) Retail segment will be a key driver for growth. e) Reduction in the cost to income ratio due to scale of operations will provide competitive age. f) It will reduce the pressure on the capital adequacy front. g) Long term of the merger would offset the temporary hiccups. h) The benefits of leveraging and cross selling will set off the cost of carrying the reserves. i) Creation of an asset reconstruction companies (ARC) to manage NPAs. j) Merger has been completed without seeking concessions on the reserve requirements; this is an important aspect of reverse merger.
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4.5
Benefits From Merger
1) Biggest benefit that would accrue to the merged entity is operational and economic efficiency. Both ICICI and ICICI Bank operate through different premises in a city. Merger would facilitate use of common infrastructure and computer network to carry out their operations. It would drastically reduce duplication of functions and operational costs and improve efficiency. ICICI, being a financial institution, takes care of long term fund requirement of corporate while ICICI Bank gives short term loan for financing the working capital requirement of corporate and individuals. Now under one roof ICICI will be able to do project finance investment banking, housing finance and consumer loans. 2) Merged entity would have a network of 396 existing branches and extension counter, 140 existing retail finance offices and centers of ICICI. Such a huge distribution network would help it to reach a large number of corporate and retail customers. With cross-selling ICICI would be able to increase its revenues. Profits are expected to improve by at least 3% because of better utilization of funds and economies of scales in operation. With merger ICICI will become a single shop for all type of finances and can leverage better its credit appraisal skills and infrastructure. 3) Indian commercial banks, like ICICI Bank, have access to cheaper deposits from general public. As they have idle funds they invest these funds into government securities over the required Statutory Liquidity Ratio (SLR). SLR investments earn average return of 8.5% only. These banks can earn
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higher return if they finance long term requirements of corporate with these funds. On the other hand financial institutions like ICICI have shortage of funds and are saddled by poor asset quality. So weakness of both ICICI and ICICI Bank has become the strength for both the entities after merger. 4) Problem with financial institutions these days is that due to slack capital market and high level of poor assets, they cannot raise funds. Merger with banks would provide them with access to cheaper funds and retail deposits. It is not possible for government to recapitalize sick financial institutions all the times. Merger is the right move towards improving the financial health of them. ICICI has the NPA of 5.1%, achieved after accelerated provisioning of Rs. 813 crores in addition to a normal provisioning of Rs. 276 crores. On the other hand ICICI Bank has the NPA as low as 1.41%. With merger total NPA level of merged entity would come down substantially.
5) Asset based of Rs. 95000 crores.
6) Talent pool of 8275 employees.
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4.6
Issues Behind The Merger
Undoubtedly the most significant event of the past few months was the merger of ICICI with its progeny, ICICI Bank. It is easily the largest merger seen in corporate India and has the potential to seriously shake up Indias banking industry.
The merger has been on the cards of a while, and it was more a question of when rather than if. Investors have been prepared for this, a fact what is probably a major but not the only reason for ICICI Banks relatively lower valuation compared to HDFC Bank.
The rationale for the union goes something like this. ICICI was a leftover of an era when the government provided financial institution low-cost funds and ensured the monopoly over big-ticket lending. This allowed them to fix interest rates at very high levels. But this changed in the nineties and ICICI along with other financial institutions faced competition from bank and other financial entities. Banks have access to cheap funds and can lend at cheaper rates. So a major reason for the merger is to allow ICICI access to these low cost deposits.
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From the point of view of ICICI Bank, the management feels that they will gain due to increased size and scale. In fact, a lot is being made of the fact that the merged entity is now second only to State Bank of India.
Further, the management believes they will be able to better utilize synergies between the two companies. Earlier, ICICIs presence in areas such as consumer lending meant that ICICI Bank could not offer similar products. Moreover, ICICI Bank will also gain due to ICICIs strong corporate relationships and access to the vast talent pool of ICICI and its subsidiaries.
The reverse merger between ICICI and ICICI Bank will be smooth because ICICI is in the strange position of being both, a government organization and not one at the same time. It is still recognized as a specified financial institutions under Section 4A of the Companies Act. This entitles it to several privileges such as being recognized as a permitted security for investment by trusts and others, preferential treatment in terms of risk weightage attached to its bonds, and protection from disclosure norms. At the same time, there are no checks on its investment decisions and no control on salaries. This is why ICICI can pay Rs. 1 crore to CEO K.V. Kamath while the Industrial Development Bank of India (IDBI) chief has to settle for a small fraction of that amount. The anomaly arises because though government shareholding in ICICI has fallen much below 51 percent (which allows it to claim to be a non-government concern when it suits its purpose), it is yet to be denotified under Section 4A.
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But the same is not true of other Financial Institutions (FIS) that will also have to go the ICICI way into universal banking. All FIS will have to do that as their access to cheap funds has been cut off. Their spreads have narrowed; they can only survive by accessing the cheap deposit bases of banks. But the merger of an IDBI or an IFCI with a bank is not going to be easy. If one were to look at a new private sector bank, the salaries there would want an IDBI, loaded with more than its fair share of NPAS. An older, nationalized bank would bring to the table its quota of NPAS too, not to talk about a slothful staff and union problems. One can never accuse the ICICI management of not being aggressive enough. But while its belligerent expansion has kept it in the headlines, it has often failed to carry other stakeholders along. This time round its Agenda for the new millennium- the much-hyped conversion to universal bank seems to have run into rough weather. It is obvious that ICICIs investors are unhappy about the merger ratio and intend to fight for their rights. Several cases have already been filed in the Bombay High Court and the Investor Grievances Forum is also lobbying hard with institutions and bureaucrats against the merger ratio.
Ignoring the interests of other stakeholders is typical of ICICIs management and has frequently landed it is trouble. It has been sued several times for trying to ram through restructuring proposals which protects its own lending at the cost of others. A recent example is that of Arvind Mills, where a group of secured foreign lenders, led by Commerz Bank have filed civil and criminal charges against ICICI. The merger of ICICI with ICICI Bank seems to be following a similar trajectory. Although it is clear that ICICI has no future as a development financial institution,
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it will only succeed as a universal bank it is controls costs and reduces nonperforming assets. Let us examine the merger of ICICI with ICICI bank. Firstly, it is curious that of the three valuation methods recognized by SEBI, ICICI has chosen one that hurts its own shareholders the most. ICICI is indeed saddled with large NPAs, but that did not stop the management from collecting fat pay packets every year. Moreover, the goodwill it commands as a development financial institution, which is reorganized under section 4A of the Companies Act, has been ignored, as also the fact that it has frequently been able to raise large sums of money through what are dangerously termed safety bonds. Had there been factored in, it may have changed the merger ratio and also benefited ICICIs other institutional shareholders.
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4.7
ICICI Bank- One Year After Universal Banking
Conversion to Universal Bank by ICICI did not happen overnight. ICICI CEO Kamath's predecessor Narayan Vaghul started the process of strategic diversification. Kamath hastened the process and in the last 5 years pushed ICICI towards setting up a portfolio of subsidiaries and associated companies. With a capital base of Rs.728 crores ICICI Bank was set up in 1994. With aggressive marketing and infrastructure of 400 branches and over 600 ATM's the bank grew rapidly. The intent to become international player was very clear when both ICICI and ICICI Bank got listed on the New York Stock Exchange (NYSE). ICICI has also forayed into insurance. To become Universal Bank ICICI had accelerated provisioning of Rs.813 crores in additional to the normal provisioning of Rs.276 crores to bring down the NPA to the more acceptable 5.1 percent. Impact of The Merger The merger of ICICI and two of its subsidiaries with ICICI bank has combined two organizations with complementary strengths and products & similar processes & operating architecture. The merger has combined the large capital base of ICICI with the strong deposit raising capability of ICICI Bank, giving ICICI bank approved ability to increase its market share in banking fees and commissions, while lowering the overall cost of funding through access to lowercost retail deposits. ICICI Bank would now able to leverage the strong corporate relationships that ICICI has built, seamlessly providing the whole range of financial products and services to corporate clients. The merger has also resulted in the integration of retail finance operations of ICICI, and its two merging
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subsidiaries, and ICICI into one entity, creating an optimal structure for the retail business and allowing full range of asset and liability products to be offered to all retail customers. Challenges Faced On Account Of Merger The merger itself posed many challenges i.e. of raising large incremental resources, deploying them to meet regulatory norms, steering through statutory processes and obtaining regulatory and shareholders approvals. Present Goals and Targets of ICICI Bank 1. To leverage the strengths of the merged entity to deliver value to stakeholders. 2. To focus on maximizing economic value of assets through innovative solutions and aggressive recovery actions. 3. To adopt global best practices to deliver financial solutions to their customers to convert India-linked banking opportunities in the selected international markets. 4. To capitalize on new business opportunities, leverage their brand & distribution capability, proactively adopt technology and develop human capital. Comments/ Views on Present Position Of The ICICI Bank Presently ICICI has established as a full-fledged Universal bank and has by passed all the teething problems. As a first Universal bank in the Country, our bank is now marching ahead towards its predetermined goals and ready to capture global business too.
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ISSUES & CHALLENGES IN UNIVERSAL BANKING

1. Challenges in Universal Banking There are certain challenges, which need to be effectively met by the universal banks. Such challenges need to build effective supervisory infrastructure, volatility of prices in the stock market, comprehending the nature and complexity of new financial instruments, complex financial structures, determining the precise nature of risks associated with the use of particular financial structure and transactions, increased risk resulting from asymmetrical information sharing between banks and regulators among others. Moreover norms stipulated by RBI treat DFIs at par with the existing commercial banks. Thus all Universal banks have to maintain the CRR and the SLR requirement on the same lines as the commercial banks. Also they have to fulfill the priority sector lending norms applicable to the commercial banks. These are the major hurdles as perceived by the institutions, as it is very difficult to fulfill such norms without hurting the bottom-line. There are certain challenges, which need to be effectively met by the universal banks. Such challenges include weak supervisory infrastructure, volatility of prices in the stock market, comprehending the nature and complexity of new financial instruments, complex financial structures, determining the precise nature of risks associated with the use of particular financial structure and transactions, increased risk resulting from asymmetrical information sharing between banks and regulators among others.
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2. Issues of concern for Universal Banking:
Deployment of capital:
If a bank were to own a full range of classes of both the firms debt and equity the bank could gain the control necessary to effect reorganization much more economically. The bank will have greater authority to intercede in the management of the firm as dividend and interest payment performance deteriorates.
Unhealthy concentration of power: In many countries such a risk prevails in specialized institutions, particularly
when they are government sponsored. Indeed public choice theory suggests that because Universal Banks serve diverse interest, they may find it difficult to combine as a political coalition even this is difficult when number of members in a coalition is large.
Impartial Investment Advice: There is a lengthy list of problems, involving potential conflicts between the
banks commercial and investment banking roles. For example there may be possible conflict between the investment bankers promotional role and commercial bankers obligation to provide disinterested advice. Or where a Universal Banks securities department advises a bank customer to issue new securities to repay its bank loans. But a specialized bank that wants an unprofitable loan repaid also can suggest that the customer issues securities to do so.
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Chapter 5
Presentation, Analysis And Interpretation Of Data, Suggestion,Findings And Conclusion
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5.1
PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
1. Are you aware that your bank is a universal bank? Particulars Yes No No. of respondents 12 18 % 40 60
Awareness about universal bank
40% 60%
Yes No
2. Were your needs met efficiently & effectively?

Particulars Yes No No. of respondents 26 4 % 87 13
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Effectiveness & Efficiency

13% Yes No 87%
3. Was the staff skilled enough to meet your needs?
Particulars Yes No
No. of respondents 28 2
% 93 7
Skilled Staff
7%
Yes No 93%
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INTERPRETATION OF DATA
Most of the respondents are not aware of the concept of universal banking in India. Around 60% of the respondents first asked about the concept of universal banking and then filled the questionnaire. Only 40% respondents were aware about the concept of universal banking. of the
Majority of the respondents availed the common banking services like ATMs, debit card, credit card, telebanking, Internet banking and other
facilities of savings, loans, etc. and a very few respondents used the facilities of trade finance and treasury options.
Majority of the respondents said that the bank provides various products & services to each individual according to his or her needs ranging from personal banking to individuals to corporate banking for Corporates.
The respondents felt that single window shopping is far way better than going to different places for different purposes. They also said that they could get everything under one roof with proper guidance.
Majority of the respondents felt that the time saved is the main benefit and also such banks provides various investment options and guidance regarding the best possible way of utilizing the money.
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The majority of the respondents were happy with the services & products offered by the bank and they also agreed that their requirements were met efficiently and effectively due to the well trained staffs. The majority had a good experience with the staff members as they were very co-operative and supporting.
When explained to the respondents about the importance of universal banking and its benefits they all agreed that there is a need of universal banks. Banking has always been a relationship business. Universal banking, focuses on fostering better relationships with customers, which is used a retention tool. Universal banks can also give advantage of lower fees to a customer who gets all his banking needs from the same bank, be it purchase of foreign exchange, managing pension funds or underwriting bonds etc.
The various suggestions given by the respondents were to create awareness about the services & products available, the benefits of using a universal bank, train the staff in such a way that the customers can be enlightened with the concept of universal banking.
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Managers view on the concept of Universal Banking based on the interview with the bank manager.
While the real concept of Universal Banking is single window banking, the
manager states that the concept of universal bank is a financial Institution with presence everywhere offering various products and services under one roof. The main benefit of universal banking is flexibility with better and innovative products and also economies of scale as it reduces the cost of operation with increase in income. The drawback inherent in universal bank is the Chances of failure due to mismanagement of large size & high risks due to investment banking and temptation to take excessive risks. The best time for transformation of any DFI into universal bank is within a year or two. The DFI should become universal banks by merging with the banks or by undertaking in-house activities, by separately created banking subsidiaries or by 'entering into joint ventures (JV) with the commercial banks.
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The DFI should be governed by the separate Regulations Exclusively Applicable to them. The resistance to change due to long evolved organizational structure is the biggest hurdle, which may crop up in the implementation of Universal Banking in India. Lack of expertise of Banks in short-term lending and of commercial banks in term lending & project finance is conceived to be the second major hurdle in the implementation of Universal Banking in India. The universal banking can be effective in a newly industrializing economy as there would be greater opportunities. Similarly the financing costs would reduce and can be a viable option for the Indian Economy with some compromise in the strategies. The DFI should create a 100% banking subsidiary while retaining their present character if they perceive single window banking. The RBI in universal banking scenario should play a role of supervisory role rather than a power of de facto control. The banks / DFIs should be given full operational autonomy & flexibility in organizational design & internal management of universal banks which would enable them to create more benefits and add value.
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5.2
FINDINGS
By the admission of foreign investors in Indian banking sector, the competition and the service value also started to increase. By offering a broader set of financial products than what a specialized bank provides, a universal bank is able to establish long-term relationship with the customers and provide them with a package of financial services through a single-window. By virtue of their sheer size, universal banks may gain monopoly power in the market, which can have significant undesirable consequences for economic efficiency. The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as customers. With the increasing degree of deregulation and exposure of banks to various types of risks, efficient risk management systems have become essential. The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA). For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs.
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5.3
SUGGESTIONS AND RECOMMENDATIONS
There is need to review and amended the provisions of RBI Act, Banking Regulation Act, State Bank of act etc so as to bring them on same line of current banking needs Government should consider raising the prescribed capital adequacy ratio to improve the inherent strength of banks and to improve their risk taking ability. Weak public sector banks which have accumulated a high percentage of Non-Performing Assets (NPA), and in some cases, as high as 20% of their total assets. They suggested the concept of narrow banking to rehabilitate such weak banks.
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5.4
CONCLUSION
The banking scenario has changed drastically. The changes which have taken place in the last ten years are more than the changes took place in last fifty years because of the institutionalization, liberalization, globalization and automation in the banking industry.
Universal banking is the fastest growing sector of the banking industry with the key success by attending directly the needs of the end customers is having glorious future in coming years.
Universal banking sector as a whole is facing a lot of competition ever since financial sector reforms were started in the country. Walk-in business is a thing of past and banks are now on their toes to capture business. Banks therefore, are now competing for increasing their business.
There is a need for constant innovation in universal banking. This requires product development and differentiation, micro-planning, marketing, prudent pricing, customization, technological upgradation, home / electronic / mobile banking, effective risk management and asset liability management techniques.
However, the kind of technology used and the efficiency of operations would provide the much needed competitive edge for success in universal banking business. Furthermore, in all these customer interest is of chief importance.
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Bibliography
www.rbi.org.in www.icicibank.com www.indiatimes.com www.icfaipress.org www.financialexpress.com www.economictimes.com www.answers.com/topic/universal-banking www.investopedia.com/terms/u/universalbanking www.google.com
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ANNEXURE
Questionnaire for Manager Name of the manager : _______________________________
1. a) b) c) d)
What is the perception of concept of universal banking? A combination of commercial banking A financial institution with presence everywhere Single-window banking Others
2. Benefits of universal banking in India a) b) c) d) e) f) Economies of scale Flexibility Better & innovative products Reduction of risk by diversification Access to international financial markets Higher output
3. Drawbacks inherent in universal banking in India a) b) c) d) e) Chances of failure due to mismanagement of large size Vulnerable to high risks due to investment banking Acquisition of monopolies Difficult to monitor, supervise Temptation to take excessive risks
4. Opportune time for transformation into universal bank a) Right now b) 1 year hence
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c) 2 years hence d) 5 years hence e) Others 6. If you perceive the expansion of activities as universal banking, the DFIs should become universal banks by: a) Undertaking in-house activities, i.e., activities undertaken in departments of Present organization. b) By acquiring controlling interest in banks if the RBI allows dis-investment In such public sector banks. c) Separately created banking subsidiaries. d) Merging with banks e) Entering into joint ventures (JVS) with banks/DFI. 7. If DFIs convert themselves into banks they shoulda) Confirm to all prudential, regulatory and supervisory norms which are applicable to banks. b) Governed by the separate regulations exclusively applicable to them c) Others
8. What hurdles may crop up in the implementation of universal banking in India? a) DFIs not agreeing to comply with the regulatory framework as applicable to Banks. b) Resistance to change due to long evolved organizational structures of DFIs And banks. c) Lack of expertise of DFIs in short -term lending & of banks in term lending And project finance.
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9.
Would universal banking be effective in a newly industrializing economy? a) Yes b) No
10.
Does universal banking reduce corporate financing costs for a newly Industrializing economy? a) Yes b) No
11.
What does it mean to India? Is it a viable option for the oh so tempestuous Indian economy? a) Yes b) No
12.
If you perceive "single-window banking" as universal banking, the DFIs should : Transform them into a bank. Create a 100% banking subsidiary while retaining their present character.
13.
What should be the role of RBI in "universal banking scenario"? Supervisory Power of de-facto control.
14.
In organizational design & internal management of universal banks, whether Full operational autonomy & flexibility be granted to banks/DFI? Yes No
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Questionnaire for customers Name : _______________________________
1. Are you aware that your bank is a universal bank? a) Yes b) No 2. What are the services availed by you in this bank? Ans) 3. How would you describe the products & services that the bank offers? Ans) 4. Why should one consider a universal bank? How is it different from other banks? Ans) 5. How is it beneficial than other banks? Ans) 6. Were your needs met efficiently & effectively? a) Yes b) No 7. Was the staff skilled enough to meet your needs? a) Yes b) No 8. Do we really need universal banks? Ans) 9. What would you recommend in order to improve the services of a universal bank? Ans)
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College of Commerce and Economics

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Products And Services Offered By Universal Banks coupled with SWOT

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Broad Classification of Products in a Universal bank:

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In short, trade finance means money lent to exporters or importers.

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Automatic Teller Machine

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Advantages of ATMs: To the Customers

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Electronic Funds Transfer (EFT)

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Benefits of Internet Banking:

Financial Transaction on the Internet:

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There are other various types of banking services like:

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To eradicate the 'Financial Apartheid'

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Chapter 3 Committee Reports, Guidelines & its Impact

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At present, only an arms-length relationship between a bank and

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Development financial institutions (DFIs) can turn themselves into

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