AMIT SANGWAN INTRODUCTION 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 activities 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. Cont’d • 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. THE CONCEPT OF UNIVERSAL BANKING • 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- 2006 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 Cond’t • 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 UNIVERSAL BANKING IN INDIA • 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. Cond’t • 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. SALIENT OPERATIONAL AND REGULATORY ISSUES OF RBI TO BE ADDRESSED BY THE FIs FOR CONVERSION INTO A UNIVERSAL BANK 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 areas. 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. 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.