universal banking by LalitMalik

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Universal Banking is a multi-purpose
and      multi-functional    financial
supermarket (a company offering a
wide range of financial services e.g.
stock, insurance and real-estate
brokerage) providing both banking
and financial services through a
single window.
    Universal Banking - Meaning

Universal banking is a combination of :-
1- Commercial banking
2- Investment banking
3- Development banking
4- Insurance and many other financial
    Definition of Universal Banking:
•   a Universal Banking is a superstore for
  financial products under one roof.
• Corporate can get loans and avail of other
  handy services, while can deposit and borrow.
• It includes not only services related to savings
  and loans but also investments.
• It is a place where all financial products are
  available under one roof.

• a universal bank is a bank which offers
  commercial bank functions plus other
  functions such as :-

               Merchant Banking, Mutual Funds,
  Factoring, Credit cards, Housing Finance, Auto
  loans, Retail loans, Insurance, etc.
For example

• In Germany commercial banks accept time
  deposits, lend money, underwrite corporate
  stocks, and act as investment advisors to large
  corporations. In Germany, there has never
  been any separation between commercial
  banks and investment banks, as there is in the
  United States.

• 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.
  Number of forced and voluntary mergers from 1961-
                        Duration                  No’s of mergers

( 1961—1968) pre- nationalization                 46

(1969-1992) nationalization                       13

(1993-2006) post-reform                           21

Forced merger                                     13

Convergences of financial institution into bank   02

Regulatory compulsion                             01

Total no’s of mergers                             80
• The phenomenon of Universal Banking as a distinct
  concept, as different from Narrow Banking came to
  the forefront in the Indian context with the
  Narsimham Committee (1998) and later the Khan
  Committee (1998) reports recommending
  consolidation of the banking industry through
  mergers and integration of financial activities.
       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 explit 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.
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.
           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 big advantage 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.
 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 long- term. Therefore,
  the transformation into a bank may not be of
  great assistance in lending long-term.
        NPA Problem Remained Intact

• he 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

• 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 Narasimham 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 an 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.
  a) Reserve requirements. Compliance with the cash
  reserve ratio and statutory liquidity ratio
  requirements would be mandatory for an FI after its
  conversion into a universal bank.
• b) 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..
• c) 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.
D) Licensing. An FI converting into a universal bank would be
required to obtain a banking licence from RBI under Section 22 of
the B. R. Act, for carrying on banking business in India, after
complying with the applicable conditions.

E) 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

F) 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.
      Objectives of Universal Banking

    The main objectives of such a model are an increased
    participation in investment strategies, securing clients
    through saving and loan schemes, development of
    private sectors and cutting costs for financial services

•   Participation in Investments
•   Savings and Loans
•   Development of Private Sector
•   Cutting the Costs
Participation in Investments:

Universal banking focuses on performance of private
firms by directly investing into such entities. By
participating on the investment market, such banks can
directly exercise decision-making power in the
governance of corporations. This objective of universal
banking aims to secure the financial interests of
companies that have received direct investment and to
protect the future development of such institutions
For example, Swiss economist Georg Rich indicates
that by aiming to directly participate on the
investment market, universal banks in Switzerland
want to ensure that the companies that have
received investment funds would deal with them
properly and will not undertake unreasonable
financial decisions
• Savings and Loans
• By delivering multiple financial services,
  universal banking aims to deliver immediate
  benefits for their clients. This makes such
  entities quite attractive for people who want
  to take care of their all financial needs at one
  place -- they can both apply for an investment
  scheme and require credit for business
Development of Private Sector

Among the main objectives of universal banking is the development of
the private sector. As such, banking institutions are highly unlikely to
cooperate with governmental funds because of their urgent need to
invest money, universal banks target the private sector as a main
source of clients. But to have such clients, universal banks need to
develop the sector and ensure its stable run and economic growth.
This has been revealed by economist Gary Gorton who states that
universal banks in Germany are the main contributors for the rapidly
expanding private sector in the country.
• Cutting the Costs
  Since many of the European continental banks are adopting the universal
  banking approach, it is essential for them to be more competitive on the
  global market where American and Asian banks offer better prices for
  providing financial services. The idea of the universal banks is to reduce
  the costs of their financial services by enlargement -- being able to expand
  their areas of expertise would empower European banks to engage in
  more serious price reduction strategies. The European Central Bank has
  already partially achieved this objective by providing low interest loans to
  European Union economies.

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