1

1ABLE OF COA1EA1

SR.NO TOPIC PAGE
NO
1 EXECUTIVE SUMMARY
2
INTRODUCTION

3 HISTORY
4
DEFINITION AND CONCEPTS

5 UNIVERSAL BANKING MODEL
6 ADVANTAGES & LIMITATIONS
7 UNIVERSAL BANKING IN INDIA
8 KHAN COMMITTEE ON UNIVERSAL BANKING &
FIS

9 NEED OF UNIVERSAL BANKING IN INDIA
10 UNIVERSAL BANKING: SOLUTION TO FIS
PROBLEMS

11 APPROACH TO UNIVERSAL BANKING
12 RBI GUIDELINES
13
UNIVERSAL BANKING - CURRENT POSITION IN
INDIA

14
SWOT

16 THE FUTURE TREND OF UNIVERSAL BANKING
IN DIFFERENT COUNTRIES

17
ISSUES & CHALLENGES IN UNIVERSAL
BANKING

18 UNIVERSAL BANKING: AN OVERVIEW
19
COMMENTS/VIEWS OF EXPERTS

20 CASE STUDY
21. CONCLUSION
22. BIBLIOGRAPHY
2






The latest mantra is Universal Banking, which is combination oI Commercial &
Investment Banking. The concept is most relevant in the United Kingdom and
the United States, Barclays Bank, Chase Manhattan and Citicorp are some oI the
examples oI it. Where historically there was a distinction drawn between
pure investment banks and commercial banks. In the US, this was a result oI
the Glass-Steagall Act oI 1933. In both countries, however, the regulatory barrier
to the combination oI investment banks and commercial banks has largely been
removed, and a number oI universal banks have emerged in both jurisdictions.
However, at least up until the global Iinancial crisis oI 2008, there remained a
number oI large, pure investment banks. In other countries, the concept is less
relevant as there is not regulatory distinction between investment banks and
commercial banks. Thus, banks oI a very large size tend to operate as universal
banks, while smaller Iirms specialised as commercial banks or as investment
banks. This is especially true oI countries with a European Continental banking
tradition. Notable examples oI such universal banks include Deutsche
Bank oI Germany, and UBS and Credit Suisse oI Switzerland.
Universal banking is the solution to FIs problems. A universal bank participates in
many kinds oI banking activities and is both a Commercial bank and an Investment
bank.
The merger oI ICICI and ICICI bank is probably the largest merger seen in
corporate India Industry, which has redeIine banking in the highly competitive era
oI globalization and liberalization. Post merger, the new entity- ICICI Bank is the
Executive Summary
3

Iirst Universal Bank in India and the second largest commercial bank in the
country aIter SBI. Financial Institutions & Insurance Companies are now merging
ahead to capture new business areas and leading towards Universal Banking.
The banking sector deregulation that took place in India during the early 1990s
posed a threat to the survival oI Development Financial Institutions (DFIs). They
were cut oII Irom the concessional Iunding extended by the government and were
exposed to intense competition Irom local and Ioreign banks. Over a period oI
time, Industrial Credit and Investment Corporation oI India Ltd. (ICICI), which
was set up as a DFI in 1955, underwent signiIicant changes to meet these
challenges. To exploit the synergies brought by universal banking, it went in Ior
mergers and acquisitions and Iinally reverse merged with its subsidiary ICICI
Bank.
The mid-eighties marked the beginning oI the shiIt to a buyers` market in the
banking space, and Bank oI Baroda, was among the Iirst to grasp this pressing
imperative. The bank orchestrated its business strategies around the centrality oI
the customer. It diversiIied rapidly into the areas oI merchant banking, housing
Iinance, credit cards and mutual Iunds. The strategy also entailed the sustained
development oI a string oI segment - speciIic branches entrenching operations in
proIitable markets, the world over. The drive was to revamp overseas operations
and intensiIy structural changes across geographies to provide services across
segments with Iocus on the Indian Diaspora. The bank sought to take to market a
vast array oI international banking and services catering to the needs oI exporters
and importers in India and abroad.
UBA is the Iirst successIul merger transaction in the history oI the Nigerian
banking sector and was born out oI a desire to lead the sector to a new era oI global
relevance by championing the creation oI the Nigerian consumer Iinance market
4

and leading a private/public sector partnership aimed at accelerating the economic
development oI Nigeria.
The Nigeria banking industry is going through so tremendous Ilux. The Central
Bank`s mandate oI a minimum N25 billion capitalization by December 2005
resulted in the Nigerian market witnessing consolidation activity on a large scale.
Though the UBA-STB merger was consummated during the ongoing consolidation
era, it was a strategic move by the bank to become a large regional player, with an
increased reach and synergies in terms oI larger customer base and complementary
product portIolio.
For the better understanding oI my project, I prepared a hypothesis. It is Universal
Banking-Next milestone Ior Banks in the coming years`. Relevance oI this
Hypothesis helped me in the conduct oI the project & also gave me a better chance
to understand the topic.




5

INTRODUCTION TO UNIVERSAL BANKING

Since the early 1990s, structural and Iunctional changes oI proIound magnitude
came to be witnessed in global banking systems. Large-scale mergers,
amalgamations and acquisitions among banks and Iinancial institutions resulted in
the growth in size and competitive strengths oI the merged entities. There thus
emerged new Iinancial conglomerates that could maximize economies oI scale and
scope by 'bundling' the production oI Iinancial services. This heralded the advent
oI a new Iinancial service organization, i.e. Universal Banking, bridging the gap
between banking and Iinancial-service-providing institutions. Universal Banks
entertain, in addition to normal banking Iunctions, other services that are
traditionally non-banking in character such as investment-Iinancing, insurance,
mortgage-Iinancing, securitization, etc. Parallel, in contrast to this phenomenon,
non-banking companies too entered upon banking business. Universal banking
usually takes one oI the three Iorms i.e. in-house, through separately capitalized
subsidiaries, or through a holding company structure. Three well-known countries
in which these structures prevail are Sweden and Germany, the UK and the US.

6

S1ORY OF UA'ERSAL BAAKAC A ADA

Historically, India Iollowed a very compartmentalized Iinancial intermediaries
allowed to operate strictly in their own respectively Iields. However, in the 1980s
banks were allowed to undertake various non-traditional activities through
subsidiaries. This trend got momentum in the early 1990s i.e., aIter initiation oI
economic reIorms with banks allowed undertaking certain activities, such as, hire-
purchase and leasing in housing. While this in a way represented a gradual move
towards universal banking, the current debate about universal banking in India
started with the demand Irom the DFIs that they should be allowed to undertake
banking activity in-house. In the wake oI this demand, the Reserve Bank oI India
constituted in December 1997, a working group under the chairmanship oI Shri
S.H. Khan, the Chairman & the Managing Director oI IDBI (hereaIter reIerred to
as Khan Working Group-KWG). The KWG, which submitted its report in May
1998, recommended a progressive move towards universal banking. The Second
Narsinham Committee appointed by Government in 1998 also echoed the same
sentiment. In January 1999, the Reserve Bank issued a Discussion Paper setting
out issues arising out oI recommendations oI the KWG and the Second Narsinham
Committee. Since then a debate has been going on about universal banking in
general and conversion oI DFIs into universal banks in particular. With the
opening up oI the insurance sector to the private participation, the debate has gone
beyond the narrow concept oI universal banking.

7

DEFINITION AND CONCEPTS

The term universal bank` has diIIerent meanings, but usually it reIers to the
combination oI commercial banking (collecting deposits & making loans) and
investment banking i.e. issuing, underwriting and trading in securities, this is the
narrow deIinition oI universal banking. In a very broad sense, the term universal
bank` reIers to those banks that oIIer a wide range oI Iinancial services, such as,
commercial banking & investment banking and other activities especially
insurance. It is a multi-purpose and multi-Iunctional Iinancial supermarket
providing both banking and Iinancial services through a single window. According
to World Bank the concept is explained as Iollows - "In universal banking, large
banks operate extensive networks oI branches, provide many diIIerent services,
hold several claims on Iirms (including equity and debt), and participate directly in
the corporate governance oI Iirms that rely on the banks Ior Iunding or as
insurance underwriters."
Universal Banking (UB) usually takes one oI the three Iorms, i.e., in-house,
through separately capitalized subsidiaries, or through a holding a capital structure.
Three well-known countries in which these structures prevail are Sweden and
Germany, the UK & US. Universal in its Iullest or purest Iorm would allow a
banking corporate to engage in-house` in any activity associated with banking,
insurance, securities, etc. However, there are very Iew countries, such as, Sweden
and Hong Kong, which allow universal banking in its purest Iorm. In Germany,
banking and investment activities are combined, but separate subsidiaries are
required Ior certain other activities. Under German banking statutes, all activities
could be carried out within the structure oI the parent bank except insurance,
mortgage banking and mutual Iunds, which require legally, separate subsidiaries.
In the UK, a broad range oI Iinancial activities is allowed to be conducted through
8

separate subsidiaries oI the bank. The third model, which is Iound in the US,
generally requires a holding company structure and separately capitalized
subsidiaries.

In certain countries these type oI universal banking are successIully Iunctioning.
Universal banking is nothing but broad based bank where you can do commercial
banking, investment, insurance, and other Iinancial business. It is largely Iound in
diIIerent countries in diIIerent Iorms.
9

UNIVERSAL BANKING MODEL



1REE KEY BUSAESS AREAS
RE1AL BAAKAC: consumer loans, credit cards(top 33 US issuer),
mortgages, internet banking, ample range oI deposits.
CORPORA1E BAAKAC: a Iull range oI products and Iinancial services Ior
SMEs and corporates.
WEAL1 MAAACEMEA1: advise and taylored products to individual
customers, retirement plans and private banking. US$ 8Bn in AUM
660
3710
37
WLAL1P MAnACLMLn1
8L1AlL
CC8C8A1L
880
620
2670
3880
18LASu8?
WLAL1P MAnACLMLn1
CC8C8A1L
8L1AlL
10

ADVANTAGES AND LIMITATIONS OF UNIVERSAL
BANKING

O ADVANTAGES

1. Creater economic efficiency
The main argument in Iavour oI universal banking is that it results in greater
economic eIIiciency in the Iorm oI lower cost, higher output and better products.
This logic stems Irom the reason that when sector participants are Iree to choose
the size and product-mix oI their operations, they are likely to conIigure their
activities in a manner that would optimize the use oI their resources and
circumstances.

2. Economies of scale
It means lower average costs, which arise when larger volume oI operations
are perIormed Ior a given level oI overhead on investment. Economies oI scope
arise in multi-product Iirms because costs oI oIIering various activities by diIIerent
units are greater than the costs when they are oIIered together. Economies oI scale
and scope have been given as the rationale Ior combining the activities. A larger
size and range oI operations allow better utilisation oI resources/inputs.

. Easy handling of business cycles
Due to various shiIts in business cycles, the demand Ior products also
varies at diIIerent points oI time. It is generally held that universal banks could
easily handle such situations by shiIting the resources within the organization as
11

compared to specialized banks. Specialized Iirms are also subject to substantial
risks oI Iailure.
Because their operations are not well diversiIied. By oIIering a broader set oI
Iinancial 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 oI Iinancial services through a single window.

O LIMITATIONS

1. Failure Risk System
The larger the banks, the greater the eIIects oI their Iailure on the
system. The Iailure oI a larger institution could have serious ramiIications Ior the
entire system in that iI one universal bank were to collapse, it could lead to a
systemic Iinancial crisis. Thus, universal banking could subject the economy to the
increased systemic risk.

2. Risk of increase in Monopoly power
Historically, an important reason Ior limiting combinations oI activities
has been the Iear that such institutions, by virtue oI their sheer size, would gain
monopoly power in the market, which can have signiIicant undesirable
consequences Ior economic eIIiciency |Borio and Filosa, 1994|. Two kinds oI
concentration should be distinguished, viz., the dominance oI universal banks over
non-Iinancial companies and concentration in the market Ior Iinancial services.
The critics oI universal banks blame universal banking Ior Iostering cartels and
enhancing the power oI large non-banking Iirms.


12

. Bureaucratic and inflexible
Some critics have also observed that universal banks tend to be
bureaucratic an inIlexible and hence they tend to work primarily with large
established customers and ignore or discourage smaller and newly established
businesses. Universal banks could use such practices as limit pricing or predatory
pricing to prevent smaller specialized banks Irom serving the market. This
argument mainly stems Irom the economies oI scale and scope.
13

UNIVERSAL BANKING IN INDIA

In India Development Iinancial institutions (DFIs) and reIinancing
institutions (RFIs) were meeting speciIic sectoral needs and also providing
long-term resources at concessional terms, while the commercial banks in
general, by and large, conIined themselves to the core banking Iunctions oI
accepting deposits and providing working capital Iinance to industry, trade
and agriculture. Consequent to the liberalization and deregulation oI
Iinancial sector, there has been blurring oI distinction between the
commercial and investment banking.
Reserve Bank oI India constituted on December 8, 1997, a Working
Group under the Chairmanship oI Shri S.H. Khan to bring about greater
clarity in the respective roles oI banks and Iinancial institutions Ior greater
harmonization oI Iacilities and obligations. Also report oI the Committee on
Banking Sector ReIorms or Narasimham Committee (NC) has major bearing
on the issues considered by the Khan group. The issue oI universal banking
resurIaced in Year 2000, when ICICI gave a presentation to RBI to discuss
the time Irame and possible options Ior transIorming itselI into an universal
bank. Reserve Bank oI India also spelt out to Parliamentary Standing
Committee on Finance, its proposed policy Ior universal banking, including
a case-by-case approach towards allowing Domestic Iinancial institutions to
become the universal banks.
Now RBI has asked FIs, which are interested to convert itselI into a
universal bank, to submit their plans Ior transition to a universal bank Ior
consideration and Iurther discussions. FIs need to Iormulate a road map Ior
14

the transition path and strategy Ior smooth conversion into an universal bank
over a speciIied time Irame.

KHAN COMMITTEE ON UNIVERSAL BANKING & FIS
The khan committee on harmonizing the role and operations oI development
Iinancial institutions and banks submitted its report on April 24, 1998 with
Iollowing recommendations: -
Give banking license to DFIs
Merge banks with banks, DFIs
Bring down CRR progressively
Phase out SLR
RedeIine priority sector
Set up a super regulator to coordinate regulators` activities
Develop risk-based supervisory Iramework
Usher in legal reIorms 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



15

SOME COACEP1S.
O Universal Banking
Universal banking reIers to elimination oI the distinction between the
development Iinancial institutions and the banks and market segmentation that
presently exists between them.

O armonization Of Role Of Banks And DFs
Harmonization means the introduction oI universal banking in a limited
sense, wherein the DFIs could become banks and intermediate in the short-term
end oI the Iinancial market (say Iinance Ior working capital) and commercial banks
could enter the long-term end oI the Iinancial market (say project Iinancing). In
other words, the harmonization allows the DFIs and banks to move Ireely to the
other end than where they are presently placed.
O 1he Main Areas Of Operations Of DFs And Banks Presently And ow
Universalisation Will Change 1hat Role n Future.
DFIs are specialist institutions catering to diIIerent sectors, appraising
projects Irom technical and Iinancial parameters and Iinance long-term investment
requirements. This specialization has given edge to DFIs in terms oI 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 Iinance to industry, exports, imports, small industry, agriculture etc. They
can take as intermediates in a big way at the other end oI their markets where they
16

are less dominant presently. Some oI them may even diversiIy into insurance and
other related areas.
O Requirement Of Cost Considerations n Universalisation
Cost oI Iunds diIIerentiates the DFIs Irom banks, as DFIs incur higher costs
Ior mobilizing long-term Iinance. Banks do not normally mobilize substantial
deposit resources with maturities in excess oI 5 years, which limits their capacity
to extend long-term loans. This has resulted in participation type oI relationship in
Iinancing by banks and DFIs.
O 1he Areas Of Conflict arising Between Banks And DFs
There are conIlicts relating to securities Ior the loans sanctioned by the banks
and DFIs. While the DFIs have Iirst charge over block assets, the banks have Iirst
charge on current assets, which place both the banks and DFIs in diIIerent
positions.
Another area oI conIlict is extension oI reIinance by DFIs to banks to
supplement banks` long-term resources. But due to higher cost oI their Iunds, the
DFIs Iind it a losing proposition.
O 1he Committee Which Recommended Universal Banking & What t
Suggested
The SH Khan Committee suggested the concept oI Universal Banking. It also
suggested to give banking licence to DFIs, merging banks with banks or DFIs,
bring down CRR progressively, phase out SLR, redeIine priority sector, set up a
super regulator to coordinate regulators` activities, develop risk-based supervisory
17

Iramework, usher in legal reIorms 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`
licence to DFIs, set up a standing committee to coordinate lending policies etc.
O 1he Likely Cains From Universalisation
The universalisation is expected to result in expansion oI banks and
diversiIication into new Iinancial and Para-banking services. The business Iocus oI
the banks would emerge on proIit lines. This may at the same time result in
reluctance on their part to enter the smaller end oI retail banking particularly, the
small borrowers in rural areas, who may Iind it diIIicult to access the banking
services, since they do not contribute substantially to Banks` Business Volumes Or
ProIits.
O 1he Apprehensions Of Universalisation
The Iinancial services may not become the privilege oI elitist. II the reIorms
with a human Iace are what we want, the universal banking has to make
adjustments and ensure that Iinancial services are available to all at aIIordable
costs.
18

NEED OF UNIVERSAL BANKING IN INDIA

O The phenomenon oI universal bankingas diIIerent Irom narrow banking is
suddenly in the news. With the second Narasimham Committee (1998) and
the Khan Committee (1998) reports recommending consolidation oI the
banking industry through mergers and integration oI Iinancial activities, the
stage seems to be set Ior a debate on the entire issue.

O A universal bank is a one-stop` supplier Ior all Iinancial products and
activities, like deposits, short-term and long-term loans, insurance,
investment etc.

O The beneIits to banks Irom universal banking are the standard argument
given everywhere also by the various Reserve Bank committees and
reportsin Iavour oI universal banking is that it enables banks to exploit
economies oI scale and scope.

O So that a bank can reduce average costs and thereby improve spreads iI it
expands its scale oI operations and diversiIies its activities.

O The bank can diversiIy its existing expertise in one type oI Iinancial service
in providing the other types. So, it entails less cost in perIorming all the
Iunctions by one entity instead oI separate specialized bodies.

19

O A bank has an existing network oI branches, which can act as shops Ior
selling products like insurance. This way a big bank can reach the remotest
client without having to take recourse to any agent.

O Many Iinancial services are inter-linked activities, e.g. insurance and
lending. A bank can use its instruments in one activity to exploit the other.

O The idea oI one-stop-shopping` saves a lot oI transaction costs and
increases the speed oI economic activity. Another maniIestation oI universal
banking is a bank holding stakes in a Iirm.

O In India, too, a lot oI opportunities are there to be exploited. Banks,
especially the Iinancial institutions, are aware oI it. And most oI the groups
have plans to diversiIy in a big way.

O At present, only an` arms-length` relationship between a bank and an
insurance entity has been allowed by the regulatory authority, i.e. the
Insurance Regulatory and Development Authority (IRDA).


O Development Iinancial institutions (DFIs) can turn themselves into banks,
but have to adhere to the statutory liquidity ratio and cash reserve
requirements meant Ior banks, which they are lobbying to avoid.

O All these can be seen as steps towards an ultimate culmination oI Iinancial
intermediation in India into universal banking.
20

UNIVERSAL BANKING: SOLUTION TO FIs PROBLEMS

The Iinancial institutions (FIs) such as ICICI, IDBI are reported to be
exploring possibilities oI conversion into universal banks as a solution Ior their
problems. This Iollows the recommendation oI the S.H.Khan Working Group. The
FIS come into existence, in pursuance oI the earlier policy oI the State arranging
Iunds Ior institutions set up Ior providing long-term Iinance. In the earlier period,
FIS had access to the Long Term Operation Fund (LTO) set up the RBI out oI its
surpluses. With the initiation oI reIorms in 1996,the RBI discontinued the
LTO.The term lending institutions, which had depended on LTO Iunds were leIt
without Iunds. Added to this were the series oI adverse developments in the
industrial sector in India, partly as a result oI opening up the economy. Many
corporate become sick, as they were unprepared Ior strong competitive
environment. Thus the FIs had also indulged in a liberal splurge oI debt Iinancing,
in the optimistic expectation that liberalization would mean an improvement in
prospects Ior industries. ThereaIter FIs Iaced by a surge oI NPAs.
The problem oI easier access to resources has been one oI the driver`s
behind the suggestion to make FIs universal banks. As UBs, FIs will it is expected,
be able to access deposits Irom a wider depositor base. UB is term usually used to
cover category oI institutions which do various banking businesses including
investment banking, securities trading, besides payment and settlement Iunctions
and also insurance. The emphasis oI the Khan Working Group on UB is however
more in the direction oI converting the FIs to commercial banks.
The RBI has rightly adopted a cautious approach to this problem and its
solution. The conversion oI FIs to commercial banks is not by itselI a panacea.
Conversion also implies that the banks will have to be subject to the statutory
requirement such as SLR and CRR.RBI may give some relaxation in statutory
21

requirement in case oI new entrant FIs/Ubs. One more way is to asset
reconstruction device to sell NPAs oI the FIs and to generate Iunds. Asset
Reconstruction Committees (ARCs) where recommended Ior commercial banks by
the M.S.Verma Committee. Is balance sheets are heavily burdened with
accumulated NPAs; thereIore Iirst they will have to sale these impaired assets
through reconstruction cos. Conversion to UB is not a remedy Ior this Iundamental
problem. One suggestion is that FIs to be merged with commercial banks. But
current level oI NPAs oI FIs will put additional burden.
ThereIore solution UB in the sense oI converting the FIs to commercial
banks may be neither adequate nor Iree Irom Iurther trouble.

22

APPROACH TO UNIVERSAL BANKING

The Narsimham Committee II suggested that Development Financial
Institutions (DFIs) should convert ultimately into either commercial banks or non-
bank Iinance 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 Ior wider public debate. The Ieedback on the
discussion paper indicated that while the universal banking is desirable Irom the
point oI view oI eIIiciency oI resource use, there is need Ior caution in moving
towards such a system by banks and DFIs..
The principle oI "Universal Banking" is a desirable goal and some progress
has already been made by permitting banks to diversiIy into investments and long-
term Iinancing and the DFIs to lend Ior working capital, etc. However, banks have
certain special characteristics and as such any dilution oI RBI's prudential and
supervisory norms Ior conduct oI banking business would be inadvisable.
Though the DFIs would continue to have a special role in the Indian
Iinancial System, until the debt market demonstrates substantial improvements in
terms oI liquidity and depth, any DFI, which wishes to do so, should have the
option to transIorm into bank (which it can exercise), provided the prudential
norms as applicable to banks are Iully satisIied. To this end, a DFI would need to
prepare a transition path in order to Iully comply with the regulatory requirement
oI a bank. The DFI concerned may consult RBI Ior 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 oI evolution oI the
Iinancial system, Narasimham Committee's recommendation that, ultimately there
should be only banks and Restructured NBFCs can be operationalised.
23

RBI GUIDELINES FOR EXISTING BANKS/FIs FOR
CONVERSION INTO UNIVERSL BANKS.

Salient operational and regulatory issues to be addressed by the Fs For the
conversion into Universal bank are:

O Reserve Requirements:-
Compliance with the cash reserve ratio and statutory liquidity ratio
requirements (under Section 42 oI RBI Act, 1934, and Section 24 oI the Banking
Regulation Act, 1949, respectively) would be mandatory Ior an FI aIter its
conversion into a universal bank

O Permissible activities
Any activity oI an FI currently undertaken but not permissible Ior a bank
under Section 6(1) oI the B. R. Act, 1949, may have to be stopped or divested aIter
its conversion into a universal bank.

O Disposal of non-banking assets
Any immovable property, howsoever acquired by an FI, would, aIter its
conversion into a universal bank, be required to be disposed oI within the
maximum period oI 7 years Irom the date oI acquisition, in terms oI Section 9 oI
the B. R. Act.

O Composition of the Board
Changing the composition oI the Board oI Directors might become
necessary Ior some oI the FIs aIter their conversion into a universal bank, to ensure
24

compliance with the provisions oI Section 10(A) oI the B. R. Act, which requires
at least 51 oI the total number oI directors to have special knowledge and
experience

O Prohibition on floating charge of assets
The Iloating charge, iI created by an FI, over its assets, would require,
aIter its conversion into a universal bank, ratiIication by the Reserve Bank oI India
under Section 14(A) oI the B. R. Act, since a banking company is not allowed to
create a Iloating charge on the undertaking or any property oI the company unless
duly certiIied by RBI as required under the Section.

O Nature of subsidiaries
II any oI the existing subsidiaries oI an FI is engaged in an activity not
permitted under Section 6(1) oI the B R Act , then on conversion oI the FI into a
universal bank, delinking oI such subsidiary / activity Irom the operations oI the
universal bank would become necessary since Section 19 oI the Act permits a bank
to have subsidiaries only Ior one or more oI the activities permitted under Section
6(1) oI B. R. Act.

O Restriction on investments
An FI with equity investment in companies in excess oI 30 per cent oI the
paid up share capital oI that company or 30 per cent oI 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 oI Section 19(2) oI the B. R. Act, which prohibits a bank Irom holding
shares in a company in excess oI these limits.
25

O Connected lending
Section 20 oI the B. R. Act prohibits grant oI loans and advances by a
bank on security oI its own shares or grant oI loans or advances on behalI oI any oI
its directors or to any Iirm in which its director/manager or employee or guarantor
is interested. The compliance with these provisions would be mandatory aIter
conversion oI an FI to a universal bank.

O Licensing
An FI converting into a universal bank would be required to obtain a
banking licence Irom RBI under Section 22 oI the B. R. Act, Ior carrying on
banking business in India, aIter complying with the applicable conditions.

O Branch network
An FI, aIter its conversion into a bank, would also be required to comply
with extant branch licensing policy oI RBI under which the new banks are required
to allot at east 25 per cent oI their total number oI branches in semi-urban and rural
areas.

O Assets in India
An FI aIter its conversion into a universal bank, will be required to ensure that
at the close oI business on the last Friday oI every quarter, its total assets held in
India are not less than 75 per cent oI its total demand and time liabilities in India,
as required oI a bank under Section 25 oI the B R Act.

O Format of annual reports
26

AIter converting into a universal bank, an FI will be required to publish its
annual balance sheet and proIit and loss account in the in the Iorms set out in the
Third Schedule to the B R Act, as prescribed Ior a banking company under Section
29 and Section 30 oI the B. R. Act.

O Managerial remuneration of the Chief Executive Officers
On conversion into a universal bank, the appointment and remuneration oI
the existing ChieI Executive OIIicers may have to be reviewed with the approval
oI RBI in terms oI the provisions oI Section 35 B oI the B. R. Act. The Section
stipulates Iixation oI remuneration oI the Chairman and Managing Director oI a
bank by Reserve Bank oI India taking into account the proIitability, net NPAs and
other Iinancial parameters. Under the Section, prior approval oI RBI would also be
required Ior appointment oI Chairman and Managing Director.

O Deposit insurance
An FI, on conversion into a universal bank, would also be required to comply
with the requirement oI compulsory deposit insurance Irom DICGC up to a
maximum oI Rs.1 lakh per account, as applicable to the banks.

O Authorized Dealer's License
Some oI the FIs at present hold restricted AD license Irom RBI, Exchange
Control Department to enable them to undertake transactions necessary Ior or
incidental to their prescribed Iunctions. On conversion into a universal bank, the
new bank would normally be eligible Ior Iull-Iledged authorized dealer license and
would also attract the Iull rigor oI the Exchange Control Regulations applicable to
27

the banks at present, including prohibition on raising resources through external
commercial borrowings.

O Priority sector lending
On conversion oI an FI to a universal bank, the obligation Ior lending to
"priority sector" up to a prescribed percentage oI their 'net bank credit' would also
become applicable to it .

O Prudential norms
AIter conversion oI an FI in to a bank, the extant prudential norms oI RBI
Ior the all-India Iinancial institutions would no longer be applicable but the norms
as applicable to banks would be attracted and will need to be Iully complied with.

28

UNIVERSAL BANKING - CURRENT POSITION IN INDIA

In India Development Iinancial institutions (DFIs) and reIinancing institutions
(RFIs) were meeting speciIic sect oral needs and also providing long-term
resources at concessional terms, while the commercial banks in general, by and
large, conIined themselves to the core banking Iunctions oI accepting deposits and
providing working capital Iinance to industry, trade and agriculture. Consequent to
the liberalization and deregulation oI Iinancial sector, there has been blurring oI
distinction between the commercial banking and investment banking.
Reserve Bank oI India constituted on December 8, 1997, a Working Group under
the Chairmanship oI Shri S.H. Khan to bring about greater clarity in the respective
roles oI banks and Iinancial institutions Ior greater harmonization oI Iacilities and
obligations. Also report oI the Committee on Banking Sector ReIorms or
Narasimham Committee (NC) has major bearing on the issues considered by the
Khan Working Group.
The issue oI universal banking resurIaced in Year 2000, when ICICI gave a
presentation to RBI to discuss the time Irame and possible options Ior transIorming
itselI into an universal bank. Reserve Bank oI India also spelt out to Parliamentary
Standing Committee on Finance, its proposed policy Ior universal banking,
including a case-by-case approach towards allowing domestic Iinancial institutions
to become universal banks.

Now RBI has asked FIs, which are interested to convert itselI into a universal
bank, to submit their plans Ior transition to a universal bank Ior consideration and
Iurther discussions. FIs need to Iormulate a road map Ior the transition path and
29

strategy Ior smooth conversion into a universal bank over a speciIied time Irame.
The plan should speciIically provide Ior Iull compliance with prudential norms as
applicable to banks over the proposed period.



30

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 oI Universal Banking is that it results in greater economic
eIIiciency in the Iorm oI lower cost, higher output and better products. Various
Reserve Banks Committees and reports in Iavor oI Universal Banking, is that it
enables banks to exploit economies oI scale and scope. It means a bank can reduce
average costs and thereby improve spreads iI it expands its scale oI operations and
diversiIying activities.

!7ofitable Dive7sions

By diversiIying the activities, the bank can use its existing expertise in one type oI
Iinancial service in providing other types. So, it entails less cost in perIorming all
the Iunctions by one entity instead oI separate bodies.

Resou7ce Utili:ation

A bank possesses the inIormation on the risk characteristics oI the clients, which it
can use to pursue other activities with the same client. A data collection about the
31

market trends, risk and returns associated with portIolios oI Mutual Funds,
diversiIiable and non diversiIiable risk analysis, etc are useIul Ior other clients and
inIormation seekers. Automatically, a bank will get the beneIit oI being involved in
Research.

Easy ma7eting on the foundation a of B7and name

A bank has an existing network oI branches, which can act as shops Ior selling
products like Insurance, Mutual Fund without much eIIorts 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 ton an agent.


One stop shopping

The idea oI 'one stop shopping' saves a lot oI transaction costs and increases the
speed oI economic activities. It is beneIicial Ior the bank as well as customers.

Investo7 f7iendly activities

Another maniIestation oI Universal Banking is bank holding stakes in a Iirm. A
bank's equity holding in a borrower Iirm, acts as a signal Ior other investors on to
the health oI the Iirm, since the lending bank is in a better position to monitor the
Iirm's activities.


32

Weaknesses:

G7ey a7ea of Unive7sal Ban

The path oI Universal Banking Ior DFIs is strewn with obstacles. The biggest one
is overcoming the diIIerences in regulatory requirements Ior a bank and DFI.
Unlike banks, DFIs are not required to keep a portion oI their deposits as cash
reserves.

No expe7tise in long te7m lending

In the case oI traditional project Iinance an area where DFIs tread careIully,
becoming a bank may not make a big diIIerence. Project Iinance and InIrastructure
Finance are generally long gestation projects and would require DFIs to borrow
long term. ThereIore, the transIormation into a bank may not be oI great assistance
in lending long-term.

N! p7oblem 7emained intact

The most serious problem oI DFIs have had to encounter is bad loans or Non
PerIorming Assets (NPA). For the DFIs and Universal Banking or installation oI
cutting-edge-technology in operations are unlikely to improve the situation
concerning NPAs.

Most oI the NPAs came out oI loans to commodity sectors, such as steel,
chemicals, textiles, etc. the improper use oI DFI Iunds by project promoters, a
sharp change in operating environment and poor appraisals by DFIs combined to
33

destroy the viability oI some projects. So, instead oI improving the situation
Universal Banking may worsen the situation, due to the expansion in activities
banks will Iail to make thorough study oI the actual need oI the party concerned,
the prospect oI the business, in which it is engaged, its track record, the quality oI
the management, etc.

ICICI suIIered the least in this section, but the IDBI has got worst hit oI NPAs,
considering the negative developments at Dabhol Power Company (DPC)


Opportunities:

To inc7ease efficiency and p7oductivity

Liberalization oIIers opportunities to banks. Now, the Iocus will be on proIits
rather than on the size oI balance sheet. Fee based incomes will be more attractive
than mobilizing deposits, which lead to lower cost Iunds. To Iace the increased
competition, banks will need to improve their eIIiciency and productivity, which
will lead to new products and better services.

To get mo7e exposu7e in the global ma7et

In terms oI 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 oI 'Fortune 500' based on sales, proIits, assets and
market value. It also ranks II in the list oI Forbes 2000 among all Indian
34

companies) as the asset base sans capital oI most oI the top 10 banks in the world
are much more than the asset base and capital oI 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 oI mass in their volume oI operations.

Pure routine banking operations alone cannot take the Indian banks into the league
oI the Top 100 banks in the world. Here is the real need oI universal banking, as
the wide range oI Iinancial services in addition to the Commercial banking
Iunctions like Mutual Funds, Merchant banking, Factoring, Insurance, credit cards,
retail, personal loans, etc. will help in enhancing overall proIitability.
To e7adicate the Financial pa7theid

A recent study on the inIormal sector conducted by ScientiIic Research
Association Ior Economics (SRA), a Chennai based association, has Iound out that,
'Though having a large number oI branch network in rural areas and urban areas,
the lowest strata oI the society is still out oI the purview oI banking services.
Because the small businesses in the city, 34 oI that goes to money lenders Ior
Iunds. Another 6.5 goes to pawn brokers, etc.

The respondents were businesses engaged in activities such as Iruits and vegetables
vendors, laundry services, provision stores, petty shops and tea stalls. 97 oI them
do not depend the banking system Ior Iunds. Not because they do not want credit
Irom banking sources, but because banks do not want to lend these entrepreneurs.
It is a situation oI Financial Apartheid in the inIormal sector. It means with the
help oI retail and personal banking services Universal Banking can reach this
stratum easily.
35


Threats:

Big Empi7es

Universal Banking is an outcome oI 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 proIitability there is a danger oI
'Price Distortion'. It might take place by manipulating interests oI the bank Ior the
selI interest motive instead oI social interest. There is a threat to the overall quality
oI the products oI the bank, because oI the possibility oI turning all the strengths oI
the Universal Banking into weaknesses. (e.g. - the strength oI economies oI scale
may turn into the degradation oI qualities oI bank products, due to over expansion.

II the banks are not prudent enough, deposit rates could shoot up and thus aIIect
proIits. To increase proIits quickly banks may go in Ior riskier business, which
could lead to a Iull in asset quality. Disintermediation and securitization could
Iurther aIIect the business oI banks.


36

THE FUTURE TREND OF UNIVERSAL BANKING IN
DIFFERENT COUNTRIES

Universal banks have long played a leading role in Germany, Switzerland, and
other Continental European countries. The principal Financial institutions in these
countries typically are universal banks oIIering the entire array oI banking
services. Continental European banks are engaged in deposit, real estate and other
Iorms oI lending, Ioreign exchange trading,
as well as underwriting, securities trading, and portIolio management. In the
Anglo-Saxon countries and in Japan, by contrast, commercial and investment
banking tend to be separated. In recent years, though, most oI these countries have
lowered the barriers between commercial and investment banking, but they have
reIrained Irom adopting the Continental European system oI universal banking. In
the United States, in particular, the resistance to soItening the separation oI
banking activities, as enshrined in the Glass- Steagall Act, continues to be stiII.

In Germany and Switzerland the importance oI universal banking has grown since
the end oI World War II. Will this trend continue so that universal banks could
completely overwhelm the specialized institutions in the Iuture? Are the
specialized banks doomed to disappear? This question
cannot be answered with a simple "yes" or "no". The German and Swiss
experiences suggest that three Iactors will determine Iuture growth oI universal
banking.

First, universal banks no doubt will continue to play an important role. They
possess a number oI advantages over specialized institutions. In particular, they are
37

able to exploit economies oI scale and scope in banking. These economies are
especially important Ior banks operating on a global
scale and catering to customers with a need Ior highly sophisticated Iinancial
services. As we saw in the preceding section, universal banks may also suIIer Irom
various shortcomings. However, in an increasingly competitive environment, these
deIects will likely carry Iar less weight
than in the past.

Second, although universal banks have expanded their sphere oI inIluence, the
smaller specialized institutions have not disappeared. In both Germany and
Switzerland, they are successIully coexisting and competing with the big banks. In
Switzerland, Ior example, the specialized institutions are
Iirmly entrenched in such areas as real estate lending, securities trading, and
portIolio management. The continued strong perIormance oI many specialized
institutions suggests that universal banks do not enjoy a comparative advantage in
all areas oI banking.

Third, universality oI banking may be achieved in various ways. No single type oI
universal banking system exists. The German and Swiss universal banking systems
diIIer substantially in this regard. In Germany, universality has been strengthened
without signiIicantly increasing the market shares oI the big banks. Instead, the
smaller institutions have acquired universality through cooperation. It remains to
be seen whether the cooperative approach will survive in an environment oI highly
competitive and
globalized banking.

38

ISSUES & CHALLENGES IN UNIVERSAL BANKING
I. Challenges in Universal Banking
There are certain challenges, which need to be eIIectively met by the
universal banks. Such challenges need to build eIIective supervisory inIrastructure,
volatility oI prices in the stock market, comprehending the nature and complexity
oI new Iinancial instruments, complex Iinancial structures, determining the precise
nature oI risks associated with the use oI particular Iinancial structure and
transactions, increased risk resulting Irom asymmetrical inIormation 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 IulIill the priority sector lending norms
applicable to the commercial banks. These are the major hurdles as perceived by
the institutions, as it is very diIIicult to IulIill such norms without hurting the
bottom-line. There are certain challenges, which need to be eIIectively met by the
universal banks. Such challenges include weak supervisory inIrastructure,
volatility oI prices in the stock market, comprehending the nature and complexity
oI new Iinancial instruments, complex Iinancial structures, determining the precise
nature oI risks associated with the use oI particular Iinancial structure and
transactions, increased risk resulting Irom asymmetrical inIormation sharing
between banks and regulators among others.

39

II. Issues of concern for Universal Banking:
1. Deployment of capital:
II a bank were to own a Iull range oI classes oI both the Iirm`s debt and equity
the bank could gain the control necessary to eIIect reorganization much more
economically. The bank will have greater authority to intercede in the management
oI the Iirm as dividend and interest payment perIormance deteriorates.
2. 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 Iind it diIIicult to
combine as a political coalition even this is diIIicult when number oI members in
a coalition is large.
. Impartial Investment Advice:
There is a lengthy list oI problems, involving potential conIlicts between the
bank`s commercial and investment banking roles. For example there may be
possible conIlict between the investment banker`s promotional role and
commercial banker`s obligation to provide disinterested advice. Or where a
Universal Bank`s securities department advises a bank customer to issue new
securities to repay its bank loans. But a specialized bank that wants an unproIitable
loan repaid also can suggest that the customer issues securities to do so.

40

CURRENT ISSUES
UNIVERSAL BANKING- Rising Popularity
As competition intensiIies banks are likely to morph into Iinancial supermarkets.
Leading the pack is Universal banks, which oIIer a wide gamut oI services targeted
at a broader customer base. Their services range Irom commercial banking and
investment banking to insurance and mobile banking.
The popularity oI universal banks has been on the rise. Few years ago,
investment banks like P Morgan, Morgan Stanley, Lehman Brothers and
Merrill Lynch were the leaders in managing G-3 currency bond deals. But times
have changed. Today, universal banks like Citigroup, Deutsche Bank and
Barclays Capital, are dominating the markets. By gobbling up smaller banks,
these banks have transIormed themselves into universal banks in Asia. This has
resulted in higher capital costs Ior companies in Asia.
1. Relationship Business
Banking has always been a relationship business. Universal banking, Iocuses
on Iostering better relationships with customers, which is used a retention tool.
Universal banks can also give advantage oI lower Iees to a customer who gets all
his banking needs Irom the same bank, be it purchase oI Ioreign exchange,
managing pension Iunds or underwriting bonds etc. By acting as lender and
underwriter, universal banks are in a better position to understand how a secondary
stock oIIering or an acquisition will aIIect critical ratios and covenants in loan
agreements. And, since banks conduct due diligence beIore making a loan, they
can jump in quickly iI a corporation wants to have a last-minute junk-bond
oIIering.
41

In Asia, bankers do have relationship lending but their approach is based on
loan tying. II the bank loses money on its loans, it recoups its capital Irom other
business driven out oI the lending process. In contrast, the universals decide, aIter
careIully considering the returns on capital. As long as the required return Irom the
relationship transaction is in line with their projections, universals go in Ior loan
tying. As opposed to this, investment banks consider returns purely on cost basis.
They are more interested in synchronizing the costs oI a particular department with
the Iees charged in the deal. So, while universal banks have the leverage to
subsidize their Iees with relationship loans investment banks stand deprived.
2. Universals' practice in Asia
Universals constantly look to lower their Iees to grab a deal. They create
special purpose entities, which allow them to write oII risky assets. These special
purpose entities help universals create capital against them. The proceeds Irom
these kinds oI activities enable them to charge lesser interest Ior extended loans.
Universals like HSBC and Standard Chartered have dominated the corporate
market Ior over three years. The capital markets have put the emphasis back on
lending. Asia's loan volumes have surpassed volumes oI equity and equity-linked
issuance in 2002, and corporate loan volume is much higher than corporate bond
issuance. This has helped universal banks make their presence in the market.
Citigroup, HSBC, Standard Chartered, ING, Bank of America and ABN
AMRO make wide use oI special purpose entities Ior the simple reason that these
entities will help them exploit a regulatory loophole in their Iunding. These entities
allow banks to transIer loans Irom the balance sheet into a vehicle that transIorms
them into capital-generating assets. Since the special purpose entities remain in the
bank`s possession, they oIIset loan costs at below-market rates. This strengthens
the banking relationship and also the risk tied to the underlying asset disappears.
42


. Future of universal banks in Asia
Universal institutions such as HSBC, Citigroup, Standard Chartered, ABN
AMRO, BNP and Barclays are increasingly dominating loan markets. The
specialized investment banks don't have access to a commercial bank's varied
deposits to lend Irom. These banks tend concentrate at their returns on equity.
However, investment banks like UBS, which have massive balance sheets, have
become very selective about their lending in Asia. Even universal banks like
Deutsche Bank are scaling down due to pressure in its home.
Universal banks tend to bond their relationship lending with successIul
companies. The investment banks are under increasing pressure to lend money the
way the universals do. A three-year collapse oI equity markets oI Asia is making
its impact on corporate capital structures. The regulatory considerations also aIIect
the Iunctioning oI the business.

43

UNIVERSAL BANKING: AN OVERVIEW

Universal Banking includes not only services related to savings and loans but
also investments. However in practice the term 'universal banks` reIers to those
banks that oIIer a wide range oI Iinancial services, beyond commercial banking
and investment banking, insurance etc. Universal banking is a combination oI
commercial banking, investment banking and various other activities including
insurance. II specialized banking is the other. This is most co in European
countries.
Scenario in India has also changed aIter the Narasimham Committee(1998)
and the Khan Committee (1998) reports recommended consolidation oI the
banking industry through mergers, and integration oI Iinancial activities. Today,
the shining example is ICICI Bank, second largest bank (in India) in terms oI the
size oI assets, which has consolidated all the services aIter the merger oI ICICI Ltd
with ICICI Bank. There are rumors oI merger oI IDBI with IDBI Bank. With the
launch oI retail banking, Kotak Mahindra has also embarked on the path oI
Universal banking.


44

COMMENTS/VIEWS OF EXPERTS

GEORGE BENSTON-THE !ROFESSOR OF FINNCE ND ECONOMICS
IS JISITING FCULTY T UNIJERSITY OF LONDON HS
EXMINED CERTIN FUNDMENTL ISSUES IN DETIL IN HIS
STUDIES, WHICH RE STTED BELOW. -

O Universal bank raises the risk of financial instability
Universal Banks tend to grow so large that Iailure oI one can cause economic
distress and that narrow, specialized banks may be better. However, the lessons
Irom savings and loans societies scandal do not support this. In Iact, neither theory
nor experience seems to validate the assumption that limitations on banking like
the separation oI commercial and investment banking either were or more likely
to be eIIective in reducing risk-taking. Incidentally, most oI the activities in which
universal banks deal are no more risky than the ordinary commercial bank
activities. A study oI the combined eIIect oI commercial and investment banking
on risk reveals that while the returns would be considerably higher, the risks would
only be strictly higher. The residual risks regarding a depository institution should
be addressed by high capital adequacy, replacing the economic capital beIore it
Ialls below zero etc., (as against book capital)

O Universal Banks deploy capital as efficiently as the stock market
While there is some merit in this, the evidence in support is quite weak. It has
been observed that the Universal banks have certain advantages in restructuring
Iirms. The transaction costs oI takeovers and mergers are high in stock market
system and night well is lower with a universal bank.
45




O Universal Banks Create Unhealthy A Concentrate Of Power
In Iact, we have seen in many countries, such a risk prevails in specialized
institutions, particularly when they are government sponsored. Indeed, public
choice theory suggests that UB serve diverse interest, they Iind it diIIicult to
combine as a political coalition-even this is diIIicult when the number oI members
in coalition is large.

46





Bank Profile
United Bank Ior AIrica PLC (UBA) is the product oI a merger oI two oI
Nigeria`s top Iive banks, UBA and Standard Trust Bank Plc (STB). Today,
consolidated UBA is largest Iinancial services institution in sub- Saharan AIrica
(excluding South AIrica) with a balance sheet size in excess oI 400 billion naira
(approx. US$ 3 bn), and over two million active customer accounts. With over 400
retail distribution outlets across Nigeria, UBA also has a presence in New York,
Grand Cayman Island and aspires to expand within Sub-Saharan AIrica.

Key Business Drivers
UBA is the Iirst successIul merger transaction in the history oI the Nigerian
banking sector and was born out oI a desire to lead the sector to a new era oI global
relevance by championing the creation oI the Nigerian consumer Iinance market
and leading a private/public sector partnership aimed at accelerating the economic
development oI Nigeria.
The Nigeria banking industry is going through so tremendous Ilux. The Central
Bank`s mandate oI a minimum N25 billion capitalization by December 2005
resulted in the Nigerian market witnessing consolidation activity on a large scale.
Though the UBA-STB merger was consummated during the ongoing consolidation
era, it was a strategic move by the bank to become a large regional player, with an
increased reach and synergies in terms oI larger customer base and complementary
product portIolio.

Case Study
47

Solution Overview
In its determination to continue to leverage on a robust IT inIrastructure
designed to achieve excellent service delivery to its teeming clientele, UBA opted
Ior Finacle universal banking solution, comprising core banking, corporate e-
banking, alerts, CRM and treasury solutions Irom InIosys in October 2005. The
relationship between Finacle and UBA dates back to 5 years ago when STB
changed Irom its existing Globus system to Finacle. Finacle core banking solution
helped power STB`s rapid growth at the turn oI the millennium and its emergence
as one oI Nigeria`s leading new generation banks. In addition STB is credited to
have spearheaded the deployment oI ATM's and internet banking in the Nigeria
market riding on Finacle.

Reaping the Benefits
To power ahead in the dynamic post-consolidation banking landscape oI Nigeria,
UBA requires a technology partnership that transcended a typical customer-vendor
relationship. From the STB experience, what emerged was the impeccable delivery
track record oI the InIosys implementation team. Recall that the bank (STB)
completed a 65-branch roll out in quick time, less than 6 months, and a Iar cry
Irom the 18-24 month implementation cycles prevalent in the country then. UBA
also needs to capitalize on an integrated channel strategy that incorporated e-
banking and CRM, among others.
Finacle will be deployed at UBA in a phased manner. In the Iirst phase, core
banking, treasury & e-banking solutions will be implemented. Finacle CRM
solution would be deployed in the subsequent phase. It is expected to be a multi-
country rollout, and the deployment extended to the US, UK & other countries
where UBA has a presence.
48


Bank Profile

Established in 1994, ICICI Bank is today the second largest bank in India and
among the top 150 in the world. In less than a decade, the bank has become a
universal bank oIIering a well diversiIied portIolio oI Iinancial services. It
currently has assets oI over US$ 79 billion and a market capitalization oI US$ 9
billion and services over 14 million customers through a network oI about 950
branches, 3300 ATM's and a 3200 seat call center (as oI 2007). The hallmark oI
this exponential growth is ICICI Bank`s unwavering Iocus on technology.

Key Business Drivers

ICICI Bank was set up when the process oI deregulation and liberalization had just
begun in India and the Reserve Bank oI India (India`s central bank) had paved the
way Ior private players in the banking sector, which at that time was dominated by
state-owned and Ioreign banks. Serving the majority oI the country`s populace,
state owned banks had a large branch network, with minimal or no automation and
little Iocus on service. Foreign banks, on the other hand, deployed high-end
technology, had innovative product oIIerings, but had a very small branch network
that serviced only corporate's and individuals with high net-worth. Sensing an
untapped opportunity, ICICI Bank decided to target India`s burgeoning middle
class and corporate's by oIIering a high level oI customer service and eIIiciency
that rivaled the Ioreign banks, on a much larger scale, at a lower cost. A crucial
aspect oI this strategy was the emphasis on technology. ICICI Bank positioned
itselI as technology-savvy customer Iriendly bank.
Case Study
49

To support its technology Iocused strategy, ICICI Bank needed a robust
technology platIorm that would help it achieve its business goals. AIter an intense
evaluation oI several global vendors, ICICI Bank identiIied InIosys as its
technology partner and selected Finacle, the universal banking solution Irom
InIosys, as its core banking platIorm. An open systems approach and low TCO
(Total Cost oI Ownership) were some oI the key beneIits Finacle oIIered the bank.
Unlike most banks oI that era, ICICI Bank was automated Irom day one, when its
Iirst branch opened in the city oI Chennai. Some oI the reasons cited by the bank
Ior its decision to select Finacle includes Finale`s Iuture-prooI technology, best-oI-
breed retail and corporate banking Ieatures, scalable architecture and proven
implementation track record.

Solution Overview

One oI the biggest challenges Ior Finacle was ensuring straight through
processing (STP) oI most oI the Iinancial transactions. With the ICICI group
having several companies under its umbrella, Finacle needed to seamlessly
integrate with multiple applications such as credit cards, mutual Iunds, brokerage,
call center and data warehousing systems. Another key challenge was managing
transaction volumes. ICICI Bank underwent a phase oI organic and inorganic
growth, Iirst by acquiring Bank oI Madura Iollowed by a reverse merger oI the
bank with its parent organization, ICICI Limited. The scalable and open systems
based architecture, enabled Finacle to successIully manage the resultant increase in
transaction levels Irom 400,000 transactions a day in 2000 to nearly 2.1 million by
2005 with an associated growth in peak volumes by 5.5 times. With Finacle, the
bank currently has the ability to process 0.27 million cheques per day and manage
50

7000 concurrent users.

Over the years, the strategic partnership between ICICI Bank and InIosys that
started in 1994 has grown stronger and the close collaboration has resulted in many
innovations. For instance, in 1997, it was the Iirst bank in India to oIIer Internet
banking with Finacle`s e-banking solution and established itselI as a leader in the
Internet and ecommerce space. The bank Iollowed it up with oIIering several e-
Commerce services like Bill Payments, Funds TransIers and Corporate Banking
over the net. The internet is a critical element oI ICICI Bank`s award winning
multi-channel strategy that is one oI the main engines oI growth Ior the bank.
Between 2000 and 2004, the bank has been able to successIully move over 70
percent oI routine banking transactions Irom the branch to the other delivery
channels, thus increasing overall eIIiciency. Currently, only 25 percent oI all
transactions take place through branches and 75 percent through other delivery
channels. This reduction in routine transactions through the branch has enabled
ICICI Bank to aggressively use its branch network as customer acquisition units.
51

On an average, ICICI Bank adds 300,000 customers a month, which is among the
highest in the world.
Channels
Share of Transactions
March 2000
Share of Transactions
March 2004
Branches 94 25
ATM's 4
Internet &
Mobile
2 21
Call Centers 1 11


Reaping 1he Benefits

A powerIul, scalable and Ilexible technology platIorm is essential Ior banks to
manage growth and compete successIully. And Finacle provides just the right
platIorm to ICICI Bank thus Iueling its growth.
The bank has successIully leveraged the power oI Finacle and has deployed the
solution in the areas oI core banking, consumer e-banking, corporate e-banking and
CRM. With Finacle, ICICI Bank has also gained the Ilexibility to easily develop
new products targeted at speciIic segments such as ICICI Bank Young Stars- a
product targeting children, Women's Account addressing working women and
Bank at campus targeting students.
52

ICICI Bank is today recognized as a clear leader in the region and has won
numerous accolades worldwide Ior its technology-driven initiatives. In 2003, the
bank received the best multi-channel strategy award Irom The Banker magazine
and this year it was rated as the 2nd best retail bank in Asia by The Asian Banker
Journal. The bank has eIIectively used technology as a strategic diIIerentiator, thus
not only redeIining the rules oI banking in India, but also showcasing how
technology can help in transIorming a bank`s business.


53




As a student oI BBI, I had a great opportunity to do a project oI 'Universal
Banking which was indeed a wonderIul experience and has enhanced my
knowledge in banking sector.
This study on Universal Banking is important not only to an organization,
shareholders and banking sector but also to an Indian economy as a whole. Due to
globalization and liberalization our economy is opening its door Ior reIorms. The
onset oI universal banking will undoubtedly accelerate the pace oI structural
change within the Indian banking system. The Iinancial institutions as a segment
will essentially convert into banks. This can potentially impose a better corporate
control structure on the Iirms, they can be sources oI long-term Iinance, and they
can contribute to real sector restructuring. Universal Banking is totally a new
concept in Indian Banking system and ICICI Bank is the Iirst Iinancial Institution
to go ahead with this concept.
Thus Universal banking, in Iact, provides Ior a caIeteria approach or, iI one were
to vary the metaphor, it would take on the role oI a one-stop Iinancial supermarket.
Industrial Credit and Investment Corporation oI India Ltd. (ICICI), which was set
up as a DFI in 1955, underwent signiIicant changes to meet the challenges that it
Iaced due to the banking deregulation act. To exploit the synergies brought by
universal banking, it went in Ior mergers and acquisitions and Iinally reverse
merged with its subsidiary ICICI Bank. ICICI Bank is today the second largest
bank in India and among the top 150 in the world. In less than a decade, the bank
Conclusion
54

has become a universal bank oIIering a well diversiIied portIolio oI Iinancial
services. It currently has assets oI over US$ 79 billion and a market capitalization
oI US$ 9 billion and services over 14 million customers through a network oI
about 950 branches, 3300 ATM's and a 3200 seat call center (as oI 2007). The
hallmark oI this exponential growth is ICICI Bank`s unwavering Iocus on
technology.
United Bank Ior AIrica PLC (UBA) is the product oI a merger oI two oI
Nigeria`s top Iive banks, UBA and Standard Trust Bank Plc (STB). Today,
consolidated UBA is largest Iinancial services institution in sub- Saharan AIrica
(excluding South AIrica) with a balance sheet size in excess oI 400 billion naira
(approx. US$ 3 bn), and over two million active customer accounts. With over 400
retail distribution outlets across Nigeria, UBA also has a presence in New York,
Grand Cayman Island and aspires to expand within Sub-Saharan AIrica. In its
determination to continue to leverage on a robust IT inIrastructure designed to
achieve excellent service delivery to its teeming clientele, UBA opted Ior
universal banking solution, comprising core banking, corporate e-banking, alerts,
CRM and treasury solutions in October 2005.







55



O BOOKS
Harmonizing the Role and operations oI development Financial Institutions
and banks-a discussion paper of R.B.I., Mumbai.
'Universal Banking- International comparisons & Theoretical
perspectives by Jordi Canals.

O MAGAZINES
Annual Report oI ICICI bank
Indian Institute Journal

O WEBSITES
www.rbi.org.in
www.icicibank.com
www.banknetindia.com
www.barclays.com
www.indiatimes.com
www.icIaipress.org
www.Iinancialexpress.com
www.allahabadbank.com
www.economictimes.com
Bibliography